Financial Assistance Scheme (Revaluation and Indexation Amendments) Regulations 2011
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Lord Freud
That the Grand Committee do report to the House that it has considered the Financial Assistance Scheme (Revaluation and Indexation Amendments) Regulations 2011.
Relevant document: 15th Report from the Joint Committee on Statutory Instruments.
Social Security (Reduced Rates of Class 1 Contributions, Rebates and Minimum Contributions) Order 2011
Lord Freud Excerpts(13 years, 2 months ago)
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Lord Freud
That the Grand Committee do report to the House that it has considered the Social Security (Reduced Rates of Class 1 Contributions, Rebates and Minimum Contributions) Order 2011.
Relevant document: 16th Report from the Joint Committee on Statutory Instruments.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, the draft order sets out the proposed contracted-out rebate rates that will apply from April 2012. Before I go into the detail of what those rates will be and why we have decided on our particular approach, I think it would assist the House if I were to explain what the rebates are and how the process to review them works.
Under the contracting-out arrangements, individuals may contract out through membership of a contracted-out salary related or money purchase occupational pension scheme or through an appropriate personal pension. Employees forego all or part of their state second pension entitlement and in return pay reduced rate national insurance contributions and/or receive an age-related rebate paid to their scheme after the end of the tax year. Employers with contracted-out occupational schemes also pay reduced national insurance. These reductions and payments are known as the contracting-out rebate.
The Pensions Act 1993 requires the Secretary of State to review the level of the contracted-out rebates at least every five years after giving due consideration to a report by the Government Actuary recommending what the level of the rebate rates should be. The legislation requires that there should be a full tax year between parliamentary approval of the rebate order and its coming into force. The last full review of the level of rebates was in 2006 for rebates from April 2007.
The present review began last year. The Government Actuary issued a consultation paper in August 2010 on the actuarial assumptions that he proposed to adopt for his report to the Secretary of State. The Government Actuary gave the responses to that consultation careful consideration before drawing up his final report. His advice to the Secretary of State has been taken into account in the proposals before the Committee. The proposals in the Government Actuary’s report reflect his view of the factors affecting the cost of providing benefits of equivalent actuarial value to the state pension foregone as a result of contracting out. These include, for example, increasing longevity; rates of investment returns; increases in earnings and prices; the future change in the indexation of the state additional pension by the consumer prices index; and future changes to state pension age.
The Government Actuary’s report and the report by the Secretary of State were laid before the House, together with the order, on 3 February. In this order, rebate percentages have been provided for members of both salary-related and defined contribution schemes. This is in spite of the Government’s plans to abolish contracting out on a defined contribution basis on 6 April 2012. This is because the requirement to review defined contribution rebate rates under Sections 42B and 45A of the Pension Schemes Act 1993 will not be repealed until the enabling legislation for abolition—primarily Section 15(1) of the Pensions Act 2007—comes into force. So, rebate rates for members of defined contribution schemes have been provided but, because these figures are not expected to be used, they have been provided for only one tax year.
Therefore the focus of today’s speech will be on the reduction in national insurance contributions which should apply to those contracted out on a defined benefit or salary-related basis. Unlike his previous reports, the Government Actuary has, with this report, provided three alternative approaches for valuing the costs of the benefits foregone by contracted-out workers in salary-related schemes: a best estimate basis; a typical funding basis; and a gilts basis. In deciding which of these alternative approaches should be adopted, we have considered that the reduction in national insurance contributions is provided at considerable cost to the taxpayer and that, therefore, the Government have a duty to ensure that the rebate is set at a level which is fair to all. Taking this into account, we believe that adopting the Government Actuary’s best estimate basis is the correct approach.
Furthermore, we believe that the assumptions upon which the Government Actuary has based his best estimate basis are justifiable. That basis provides for two different rates which may be adopted by the Secretary of State: one which takes into account the existing arrangements for state pension age; and one which takes into account the proposed changes the Government will legislate for, which will see the state pension age rise to 66 from April 2020. We have decided that the proposed rise in state pension age to 66 needs to be reflected in the revised rebate rate. This will mean a reduction in the rate of national insurance contributions from April 2012 from 5.3 per cent to 4.8 per cent of relevant earnings. If, however, it becomes apparent that the proposed state pension age changes will not take place, we will consider conducting a further review of rebate rates before the end of a further five-year period, the time by which we must review rebate rates again.
We propose broadly to maintain the division of the reduction in the level of employee and employer contributions. This will mean that the level in the reduction of employee contributions will be reduced from 1.6 percentage points to 1.4 percentage points, and the reduction in employer contributions will be reduced from 3.6 percentage points to 3.4 percentage points. For personal pensions and money purchase occupational schemes, we have again accepted the Government Actuary’s proposed rates of reduction in national insurance contributions and age-related payments which should apply but for the plans to abolish contracting out for defined contribution schemes in April 2012. This will mean that the flat rate element for contracted-out money purchase schemes will decrease to 2.4 per cent of relevant earnings for members of contracted-out money purchase schemes. This will be split between employees at 1.4 per cent and employers at 1 per cent. We have also decided to maintain the level of the age-related rebate cap. This will stay at 7.4 per cent.
As I mentioned earlier, these rates have been provided simply to meet an ongoing statutory requirement that will not lapse until contracting out for defined contribution schemes is abolished. I am satisfied that the order is compatible with the European Convention on Human Rights. I commend it to the Committee. I beg to move.
Lord Stoneham of Droxford
I have very little to say on this. This is a shadow document in many respects because it is provisional on what we are doing on the current legislation. I think we are broadly supportive of it.
Lord Freud
My Lords, I thank, in particular, the noble Lord, Lord McKenzie, for his interest in this and the noble Lord, Lord Stoneham, for making that point. To summarise, this sets out the level of contracted-out rebate rates that will apply to employers and employees within defined benefit contracted-out occupational pension schemes from April 2012. As I said earlier, while we have provided rates for defined contribution schemes, that is purely to meet the statutory requirement. As I said before, we are looking at a reduction for contracted-out defined benefit schemes from 5.3 per cent to 4.8 per cent.
As I understand it, the central question that the noble Lord, Lord McKenzie, put was about why we have picked that one rather than the funding basis or the gilts basis. I shall go a little into the concepts behind the three different approaches. Each approach is designed to provide the employer with a different level of guarantee about it being sufficient to cover the cost of the additional state pension foregone. Taking into account the considerable cost to the taxpayer of providing the reduction in national insurance contributions, the Secretary of State decided that adopting the best estimate approach was the most reasonable. When you think about it, the point about it working half the time is really saying that we have reached the point of indifference between whether you provide a pension scheme or do not do so and rely on the state. There is a rationale there. The other approaches in practice provide a much more powerful bias towards contracting out.
The noble Lord’s supplementary question was about defined benefit schemes. The risk is now essentially being run by the schemes. Different schemes will, of course, have different contributions rates for employers and employees, so there is no simple answer. The core answer is that moving to the point where, on balance, there is a point of indifference between whether you go in or out means that it is a neutral decision.
On the question about public versus private, for public sector schemes there is no extra cost to the employer as the Government are the employer so there is a degree of funds being recycled. Both public and private sector employees will see a slight reduction in take-home pay as a result.
Lord McKenzie of Luton
Perhaps I can clarify that. The note to the order, which I cannot now put my hands on, refers just to the public sector in that regard. It puzzled me because I understand that these rebates operate between the LEL and the upper accrual point, which is fixed in cash terms, in order to move towards a flat-rating of the state second pension, so I would have thought that there would potentially be a loss to all contracted-out employees. Therefore, I do not understand the distinction that is made in the Explanatory Memorandum between public and private sector.
Lord Freud
I think the noble Lord is right in saying that the loss is shared by the public and private sectors. Clearly, there is something slightly confusing in that note that has led him in a different direction. There should be an equalised effect.
Lord McKenzie of Luton
I am looking at the Explanatory Memorandum to the Social Security (Reduced Rates of Class 1 Contributions, Rebates and Minimum Contributions) Order that we are discussing. The impact paragraph states:
“There is no new impact of the changes to the contracted-out rebate rate. However, the reduction in the rebate rate will lead to a small increase in the National Insurance contributions of public sector employers and employees. The value of the increase will depend on individual employee earnings”.
Lord McKenzie of Luton
That is paragraph 10.1. Paragraph 10.2 states:
“A full impact assessment has not been published for this instrument as it has no new impact on the private sector and civil society organisations”.
Lord Freud
The impact is common across both the public and private sectors. The noble Lord asks about the impact assessment. I imagine that that is a reference to where the obligation to have an impact assessment is, rather than to the differential impact. By definition, we are saying that it does not have a new impact on the private sector and civil society organisations. By reference, that would also apply to the public sector.
Lord McKenzie of Luton
I am happy for the noble Lord to write to me on that. It is confusing. It specifically identifies public sector employees and employers as taking a hit. Paragraph 10.2 suggests no new impact on the private sector. That did not make sense to me.
Lord Freud
It is easy to see that confusion. I shall write to the noble Lord, but I am comfortable in stating that it is a reference to where the obligation to have an impact assessment is, not to who is getting the impact. That is the reason for the difference. However, I shall write to the noble Lord to lay that out very clearly. I am very impressed that anyone has got to note 10.2. I think I have dealt with all the outstanding issues.
Lord McKenzie of Luton
I am sorry to press the noble Lord but this may be part of the discussion we have just had. Is the £600 million saving by government just replicated as an extra £600 million of costs on employers and employees?
Lord Freud
Yes, I can confirm that, obviously. There is an argument there: it is a rather complicated sum, not just the sum of what has gone in and out in terms of all of the factors. To the extent that there is an extra cost, it is partly because it has become more expensive to get pensions for one reason or another. Some of that reflects the marketplace and what it costs to purchase annuities outside the Government’s scheme. Rather like me, the noble Lord will, I suspect, have gone through this understanding some, but not all, of the bits in it. However, that is the process, so the saving becomes a cost for employers and employees, given how we have split it.
I have one main item on which to write formally to noble Lords but, with that, I hope that I have dealt satisfactorily with the issues. As everyone in this Room will realise, they are highly technical. I commend the draft order to the Committee.
Women: Assistance in Pregnancy
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Baroness Gale
To ask Her Majesty’s Government what measures they are taking to assist pregnant women who no longer qualify for a maternity grant and a health in pregnancy grant.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, addressing the deficit presents difficult choices. We are focusing resources on those in greatest need. Pregnant women on low incomes will benefit from the increases to the child element of child tax credit above indexation by £180 in 2011-12 and £110 in 2012-13. All eligible women will still receive Healthy Start vouchers and will still qualify for a £500 maternity grant for their first child. We are also extending budgeting loans to include maternity needs.
Baroness Gale
I thank the Minister for his reply. What help will be given to women having a second child given that the grant will end in April and the new Social Fund amendments to allow them to claim for maternity items will not come into force until eight to 12 months’ time, so there will be a gap? What are those women supposed to do? The link has now been broken with the health in pregnancy grant, which ended in January, under which midwives and doctors gave advice to pregnant women on healthy pregnancy. How will the Minister ensure that those mothers receive good advice to make sure that they have a healthy pregnancy?
Lord Freud
There are two areas of financial help. The first is the budgeting loans. As I said yesterday, we are encouraging people to look at budgeting loans in the widest possible way. The second area is community care grants. Again, we expect that many people in the most difficult circumstances will be able to take advantage of those. The noble Baroness’s second question concerned what we were doing to help pregnant women. The Department of Health and the Department for Children, Schools and Families are developing a project, Preparing for Pregnancy, Birth and Beyond, which is looking at a renewed model of universal antenatal education and preparation for parenthood.
The Earl of Listowel
My Lords, is the Minister aware that young women in care are two and a half times more likely to become pregnant than their peers and that a quarter of young women leaving care are either pregnant or have a child already? Will he consider asking his colleagues who talk with local authorities whether all best practice in the area of support for such young women is collated and being shared as it should be?
Lord Freud
My Lords, I share the noble Earl’s great concern for children in care and take his point about the relatively much higher rate of pregnancy. I shall look closely at what we can do in that area.
Lord German
My Lords, there will be a moment of time between the outgoing regulations and the incoming regulations in respect of budgeting loans to which the Minister has just referred. Given that most people will be looking for low-cost, low-interest loans to buy such things as a buggy, a pram or a cot, what advice is the Minister giving to his department on exercising flexibility in this regard to ensure that the current regulations may be as widely accessible as possible so that people are not disadvantaged during the short period between the old and the new regulations?
Lord Freud
I thank my noble friend for reinforcing this important point. There will be a gap, probably of around nine months, before we can formally change the budgeting loans. We are making the very firm point—I made that firm point formally in the Chamber yesterday—that we are encouraging people to use the scheme to the utmost extent that they can and to apply it to slightly wider items than those around budgeting for the baby.
Lord McKenzie of Luton
My Lords, the Minister has confirmed again, as he did in the debate yesterday, that families will eventually be able to access budgeting loans. However, is he aware that just last week the Minister for Pensions announced a further tightening of the screw on the availability of crisis loans from the Social Fund on the basis that this would enable the trickle of budgeting loans to continue? Is this not making the very poor pay for the poor?
Lord Freud
My Lords, the trouble was that the crisis loans were being used in a non-crisis context to buy ordinary items of household expenditure, so we were in danger of running out of funding for the whole system because of the way it was being used. Our concern with controlling the crisis loan situation was to make sure that funding was left available for budgeting loans for exactly this kind of thing.
Lord Northbourne
Is the noble Lord aware that there is a large and growing body of research which shows that the quality of parenting and parental care during the weeks before birth and the months after birth is absolutely crucial to the way in which the child’s brain develops? Surely any kind of penny-pinching at that stage of the child’s development is a false economy.
Lord Freud
My Lords, we have to look at a holistic system of support for people who are the most disadvantaged in this country. Having bits and pieces of things that do not work is the wrong way to go. This was an example of support that was directed at the wrong point in maternity. If you want to really help in terms of what women eat, it is better to do it in the first trimester, not in the last. The structure of what we are doing with the universal credit involves a system that puts in coherent support for the most disadvantaged right the way through and, by definition, will catch people at the beginning of pregnancy, not at the end.
Lord McAvoy
My Lords, the Minister has admitted rushing through these regulations, totally against time conventions, in order to deprive new mothers of claiming after 11 April. Does he realise that this conjures up a picture of Tory and Liberal hard-faced men sitting around a table in Westminster plotting to deprive the poorest people of some financial aid? Is he proud of that?
Lord Freud
My Lords, I am not proud of a previous Government who threw bits and pieces of money around like an out-of-control farmyard muckspreader. We are making coherent provision for the most disadvantaged in a way that you could not.
Jobseeker’s Allowance (Work Experience) (Amendment) Regulations 2011
Lord Freud Excerpts(13 years, 2 months ago)
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Lord Freud
That the draft regulations laid before the House on 26 January be approved.
Relevant document: 15th Report from the Joint Committee on Statutory Instruments. Considered in Grand Committee on 2 March.
Social Fund Maternity Grant Amendment Regulations 2011
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The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I start by thanking the noble Lord, Lord Touhig, for bringing forward the Motion, which has given us a chance to discuss the issues. I have listened with great interest to the points that have been made around the House.
Before I go into specifics, I apologise for the fact that these regulations were laid very close to the date on which they came into force, and for the lack of courtesy this showed the House. I have asked officials in the Department for Work and Pensions to review where the processes broke down on this occasion so that we can avoid similar situations in future. I hope this will reassure Members that we have taken the criticisms seriously and are striving to ensure that Parliament always has at least 21 days to consider regulations. During the period of policy formulation there were some difficult and sensitive issues to be resolved about how we defined the family unit and what, if any, exceptions would apply. These may, on the face of it, appear to be straightforward changes. However, it was important that we got the policy right before pressing ahead with the regulations. I acknowledge that we underestimated the time that was needed to undertake this work, which is a lesson learnt for future policy development.
As women can claim the Sure Start maternity grant up to 11 weeks before their baby is due, it was necessary for the regulations to come into force on 24 January for them to apply to babies due on or after 11 April of this year. If they did not, we risked reducing the planned savings by around £1.4 million for each week the change was delayed. Any delay could have impacted on our wider reform strategy, which is to refocus resources from small, poorly targeted, ad hoc payments on to a wider package of ongoing support for those in greatest need, initially through changes to tax credits and the personal allowance, and in the longer term through universal credit.
In response to the questions asked by the noble Lord, Lord Touhig, and the noble Baronesses, Lady Gale and Lady Hughes, I confirm that an impact assessment was published in January. I regret the misapprehension that has circulated. There were some criticisms of the extent of the impact assessment. In particular, it was thought that there was inadequate information on ethnicity. That was due to the fact that the data simply were not available for that piece of analysis. However, the impact assessment as a whole was available.
As noble Lords have already described, the amendment to the Social Fund Maternity Grant Regulations limits payment of the £500 grant made to low-income and benefit-claiming families to the birth of the first child only. It was announced as part of last year’s emergency Budget in June. The change will come into effect for all births on or after 11 April. It will also apply to adoptions and other similar arrangements. The previous policy, under which a family could receive a grant of £500 for each child, was a generous one. It was also expensive and poorly targeted. It took no account of the number of children the family had already or of the fact that families, whatever their income, do not buy new items for each subsequent child. Our new approach is the most equitable way of providing support to low-income households with a new child. This was one of a range of measures needed to reduce the deficit we inherited from the previous Government, which, as my right honourable friend the Chancellor of the Exchequer commented at the time, is the largest budget deficit of any economy in Europe, with the notable exception of Ireland.
The urgent need to manage the deficit has presented a series of difficult choices. We have not shirked from this responsibility. As a result we are dealing decisively with the country’s record debts, planning for the future, making sure that work pays, while at the same time remaining committed to protecting the most vulnerable in society. The decision to restrict the Sure Start maternity grant to the first child was not an easy choice. We believe, however, that the new policy targets support to those families who are starting from scratch, without any baby clothes or equipment, and so for whom the one-off costs are highest. The reason we have structured it so that the payment goes to the first child—this picks up the question asked by the noble Baroness, Lady Hughes—is because in this way we ensure that the mother will receive antenatal health advice and is connected to those services at the beginning of the building of her family.
The intention for this grant—picking up the point made by the noble Lord, Lord Touhig—was never to cover all the costs of healthy eating. It was related to maternity items and associated costs of having a new baby. The Healthy Start vouchers, which remain in place, are designed to cover that requirement.
My noble friend Lord German asked a series of questions on how the structure works. Currently, a family receives a payment for each child in a multiple birth. Under the new structure, a multiple payment will be made if the first birth is a multiple birth but not if a subsequent one is. My noble friend asked what would happen when a second child was born but there was no claim associated with the birth of the first one. The grant would not become available under those circumstances given the structure that we have.
We are mindful that this change may mean that some low-income families need to borrow to cover certain costs associated with the birth of the second or subsequent child. To protect the poorest from the risk of high cost or even illegal borrowing, my honourable friend the Minister for Pensions has included provisions in the Welfare Reform Bill, which is in another place, to extend access to budgeting loans for maternity items, which are currently exempt. This will ensure that the poorest households have access to interest-free borrowing. I hope that noble Lords will support this important measure when it reaches this House.
As noble Lords have pointed out, we recognise that there will be a gap of around nine months between the point at which Sure Start maternity grants are restricted and Royal Assent of the Welfare Reform Bill. However, families will continue to have access to existing financial support. For example, budgeting loans are already an important source of financial support to the most vulnerable families when they face unexpected financial pressures. Currently, people are able to apply for a loan for a broad range of needs, including new or replacement furniture, household items and clothing. While maternity items are specifically exempted from the current budgeting loan scheme, families expecting a new baby may require funding for items that fall within the broad categories that are currently met by a payment. I would encourage people to use this scheme in this period, where appropriate.
Pensions Bill [HL]
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The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I thank the noble Baroness for her amendment. I have listened to the debate with great interest. Workers on low earnings do not qualify for automatic enrolment. They have the right to opt into pension saving but do not qualify by right to an employer contribution. The amendment seeks to ensure that these low earners receive a contribution to workplace pension saving from their employer if they choose to opt into pension saving.
I believe that the noble Baroness, Lady Hollis, may have intended us to focus on NEST, but it is worth being aware that other schemes may have earnings thresholds in their rules. Therefore, we have looked at the issue from the perspective of low earners and contributions from pound one, irrespective of which scheme their employers choose.
Persistent low earners get a high replacement rate from the state without private pension saving, so for these individuals it is questionable whether it is beneficial to redirect money into private saving. For some very low earners who are not accruing a state pension, it may be beneficial to opt into pension saving. The noble Baroness, Lady Hollis, gave an example of women in households where there were other earnings. This was an important point brought out in the Johnson review.
During our previous deliberations, the noble Baroness, Lady Drake, also brought to your Lordships’ attention the importance of adding to household saving. However, in practice, it is very hard to distinguish a clearly identifiable group of workers without qualifying earnings who would benefit from opting into pension saving. An employer contribution is an incentive to save, so it follows that for very low earners an employer contribution may be an incentive to opt in. We do not believe that it is right to encourage opting in for the very few low earners who may benefit from saving at the risk of penalising the many low earners who will not benefit from opting in. We also need to be conscious of the potential impact on employers.
Baroness Hollis of Heigham
I do not understand the point that the noble Lord has just made. Why would it penalise other low earners who do not opt in?
Lord Freud
I shall come to that question. There are around 1 million workers with annual earnings below £5,715. If these people were brought into pension saving, it could result in further employer contribution costs of up to £125 million.
There is another issue that makes me urge caution on this amendment, although I appreciate that its intention is laudable. We cannot legislate to discriminate unreasonably between different groups. This proposal could well involve such discrimination because those who earn less than £5,000 would have an employer contribution on their full earnings if they opted in. However, those who earn £8,000 would have a contribution on only £3,000 of their earnings and not on the full £8,000—I am rounding up these figures. If we did it for the lowest paid, we would have to do it for everyone, which would mean extending the requirement on employers to pay a contribution on the first £5,715 to everyone in pension saving. In effect, that would be the equivalent of removing the lower limit of the qualifying earnings band, which would be unaffordable.
Baroness Hollis of Heigham
I am grateful to the Minister for giving way. I obviously did not make myself clear. I said that there would need to be a threshold so that the ability to cover the first pound would apply only to those who are already over the threshold of, I hope, LEL and could even be at ET. In other words, if you are earning only £4,000 there is no suggestion that that would bring you into NEST, as the Minister appeared to think the amendment suggested. If that is what the words say, I apologise because that is due to my drafting. However, I had hoped that I had made the position clear in my opening speech.
Lord Freud
I am now slightly mystified by the intention of the amendment. I understood that it allowed an opt-in at any level. Perhaps the noble Baroness could clarify the position.
Baroness Hollis of Heigham
No. I apologise. It says that at the moment you are automatically enrolled at £7,500 and can opt in from £5,200 if your earnings are between those two figures. I suggest that the same opt-in right should apply to pound zero, but only if you are already at the threshold. In other words, if you are on £4,000 or £3,000, you would have no right to make a pension contribution, but if you are on anything above £5,200—certainly above £7,500—you can make contributions voluntarily not only on the band between £5,200 and £7,500 but on the band £0 to £7,500.
Lord Freud
I thank the noble Baroness for that explanation. My point of concern remains unchanged: if we allow that to happen for this particular group, we must expand it and allow everyone to make a pound one contribution. I therefore do not think that it changes the argument and the concern about the extra costs implied, which could be around £900 million of additional contributions—around one-quarter of the total cost—and represent an unacceptable burden on employers. It would also skew the structure of the reforms that are designed to enable a median earner with solid state entitlement to achieve a retirement income of around 45 per cent in line with the pension commission’s recommendation. The Johnson review endorsed that original recommendation. As the noble Baroness said, I am not putting any weight on the small sums argument—that is not part of this argument. On her point about the move of the threshold up to £10,000, we will debate that later. Clearly, I am sympathetic to the drive behind this proposal. The Government are always willing to consider ideas that will allow us to keep the appropriate balance and maintain our key policy intentions. However, we are unable to accept this amendment and I ask the noble Baroness to withdraw it.
Baroness Hollis of Heigham
I am grateful for the support of my noble friend Lady Drake on this and for the thoughtfulness of the Minister’s answer. I suspect that, possibly because of my drafting, there is a misunderstanding. I had hoped that I had made it clear in my opening speech—obviously I failed to do so—that we were talking about the situation where, if someone was required to enrol through auto-enrolment but had the voluntary right to go back to £5,200, they would also have the voluntary right to go back to pound zero. It is as simple as that. At that point, it seems to me, the Minister’s statistics of £900 million apply to the very different scenario of someone earning £2,000, £3,000 or £4,000 who could voluntarily enrol. That never was, and never has been, my argument. It has always been that those already in the system should be able to cover the first pound.
Lord Freud
I want to make this absolutely clear. Our concern here is about the discrimination that would otherwise come up. We cannot just leave pound one for one group; we would have to extend it to everyone. That is why the costs would balloon from this. It is not possible to maintain a narrow right for one group; we would have to extend it. That is one of the reasons for our concern.
Baroness Hollis of Heigham
I am simply not persuaded by this. Is the Minister saying that because the very poorest—those earning less than, say, £5,000 a year—could not come within the system, those above the LEL should not be able to go back to zero? I think it likely that the poorest might have a couple of mini-jobs or whatever and might well not qualify because they are below the LEL. The Minister would not dream of applying that argument to the national insurance system, the whole of which is based on a lower earnings limit. You are automatically brought into the NI system, building up your entitlement to the basic state pension, but you do not start to pay your NICs until you hit the £7,500 ET. That argument is the basis of the basic state pension. I have not heard the Minister say that this is unfair because someone earning £3,000 or £4,000, who is therefore below the LEL, cannot earn their way into the national insurance system. I would welcome the Minister’s comments on this.
What the Minister is saying is impossible here, because it is unfair, is at the very basis of the national insurance system for the whole of our population. If it is good enough for NICs, it is certainly good enough for NEST. I am sorry, but I do not accept the noble Lord’s argument. In practical reality, I doubt that someone on £3,000 or £4,000 would want to save, although I suppose that it is possible, as my noble friend said, because of her household circumstances rather than her own. What I am trying to do is to make available to those people in NEST the best practice for most pension schemes. That is, you can save from pound zero once you are over the earnings threshold—the LEL. Once that happens, you then end up, by choice, with a pot that is worth having. To say that it is unfair cannot be the case unless the Minister also accepts that the whole of the national insurance system is unfair. I am sure that he would not wish to go on record as saying that. I beg leave to withdraw the amendment.
Lord McKenzie of Luton
My Lords, I speak to Amendments 20 and 21 in this group, which concern the trigger. Their thrust is not dissimilar to that of the amendment moved by my noble friend, although they are perhaps less ambitious. We will shortly discuss changes to or, indeed, the deletion of the trigger, but these amendments are predicated on the trigger remaining at its current level.
Amendment 21 would give an opportunity for jobholders to bring to the attention of employers the fact that by including earnings from other employments the trigger is reached or exceeded. Therefore, if the other conditions for auto-enrolment were present, the employer would have a duty to act accordingly. I underline how modest this provision is, as it is effectively an alternative to opting in. The employer would have no auto-enrolment duty unless, among other things, the employee had qualifying earnings in respect of that particular employment. It would be of advantage only where, in respect of any particular employer, the trigger had not been reached but qualifying earnings with that employer had. As has been expressed—my noble friend Lady Drake will develop this when we discuss a subsequent group of amendments—we have concerns about the potential widening gap between the trigger and the start of the band of qualifying earnings. If that is right, being able to access contributions on that band, even though the trigger has not been met in respect of any employment, becomes more important.
Like the amendment moved by my noble friend, this amendment is in part about putting down a marker for the ambition that, at some stage in the future, the various thresholds—the trigger and the qualifying earnings—might be amalgamated with payments allocated among two or more employers, but this amendment does not seek that. However, we would be interested in the Minister’s view on the extent to which HMRC might routinely have a role in identifying where the trigger is reached for multiple earnings. In a sense, it is like the allocation of personal allowances across various notices of coding. Could that be done on a more systematic basis? The noble Lord’s work on the universal credit seems predicated on amalgamating on a real-time basis income from a range of sources, so we wonder whether there is a read-across to auto-enrolment. If there were, it would address the inertia issue that is present in the formulation of this amendment and the equivalent opt-in route.
The amendment in the name of my noble friend Lady Hollis is, as I said, pretty much on the same page, although I understand that it is not necessary for the earnings trigger to be reached for a jobholder to opt in. The right exists if the employee has qualifying earnings, but it would not allow the employee to specify a particular scheme, be it NEST or any other scheme. I think that that would be the employer’s choice, although the Minister may be able to enlarge on that. By and large, however, we are seeking to achieve the same thing. The prize for and the challenge to the Minister is to see, consistent with confidentiality of information, whether the systems that enable some more automatic notifications in some circumstances can be deployed where the trigger is in aggregate reached but not in any one employment.
Lord Freud
My Lords, on Tuesday we discussed the possible aggregation of many jobs for credit towards the basic state pension. I admit to being indebted to the ever persuasive arguments of the noble Baroness, Lady Hollis, about the effect of portfolios of many jobs, especially in rural communities, and her concern that as many low earners as possible should be able to qualify for auto-enrolment and an employer contribution.
I also note the wise cautions of the noble Lord, Lord Boswell, on Tuesday about the potential effect on employers—where aggregation is mooted—and on the labour market. As I said on Tuesday, I am sympathetic to the principle of aggregation for basic state pension purposes. I am cautious but optimistic that this could be possible in the new world of the universal credit. This is because, if Government systems can track information for universal credit, it may not be a huge leap from there to having national insurance contributions or making credits on a state pension record. However, we are now about to discuss a somewhat different issue—that of the aggregation of earnings from many jobs in relation to auto-enrolment into workplace pensions. I need to emphasise again that it is important to encourage part-time jobs and to look for a way of aggregation. However, there are greater barriers in this area than there are in the area of the state pension in terms of aggregation. That it is more complicated was stated by the noble Baroness, Lady Hollis, in her speech.
The main and unique barrier is a need not only to aggregate earnings across employers but also to apportion pension contributions between those different employers. This is quite a problem in terms of employer burden cost and complexity, which we would need to find a way to resolve. The automatic enrolment duty falls on each employer for the people they employ. There is no sharing of the duty between employers. If a person has two jobs, each of their employers is responsible for enrolling them as the legislation is presently set up. Workers who do not earn enough to qualify for automatic enrolment clearly may opt in. Those who have the qualifying earnings have the right to employer contributions, which is ground we went over just now.
The first amendment raised by the noble Baroness, Lady Hollis, seeks to increase voluntary pensions saving for people who do not earn enough to be automatically enrolled by enabling the aggregation of the many jobs and any earnings from self-employment for a person who also works on their own account. This would allow people who earn under the automatic enrolment earnings trigger, and opt in, to have their earnings for more than one job taken into account for calculating pension contributions. This looks like a straightforward proposal. However, there are considerable practical problems that would, in practice, increase employer administration burden.
Let me turn to the two amendments from the noble Baroness, Lady Drake, and the noble Lord, Lord McKenzie, which seek to enable aggregation by solving one of these practical difficulties about information sharing between employers. These amendments enable earnings from separate jobs for separate employers to be added together where the person can demonstrate to the employer that they have another job with other earnings in that week or month and that they are therefore entitled to be auto-enrolled. This is a very neat amendment that shifts the burden of proof from the employer. However, it is not quite as modest as the noble Lord suggested because it does not entirely solve the issue of the employer administration burden.
It is not immediately obvious how the employer contribution could be easily calculated or divided up. No mechanism currently exists to do that. Would multi-employers share the cost of the employer contribution? If so, how would that be done? Which employer takes responsibility for paying contributions to the pension scheme? If they share the cost, how would one employer recover the cost from the other employer? If they do not share the cost, is it fair that one employer bears the entire cost and the other none of it? Overall, we cannot see how it could be done without placing a significant and unfair burden on employers. I sympathise with the intention behind these amendments in terms of those with multiple jobs, and it is certainly an issue to keep an eye on as we go forward. It clearly—and noble Lords all acknowledge this—is not feasible with our present technology; but even if it became feasible, which it very well may, moving the burden of proof on to the worker is not the way to do it.
Standing back just a little, our first priority at this point must be to ensure that employers understand, and are able successfully to implement, their duties under automatic enrolment. That is the priority. This is not the right point to contemplate introducing significant changes to those duties, and I think noble Lords today recognise that. Introducing new and significant burdens would disrupt that process. However, noble Lords have successfully put down a marker for 2017. On that basis, we do not accept the amendment and invite noble Lords to withdraw it.
Lord Boswell of Aynho
My Lords, I wonder whether I might make my contribution before the Opposition spokesman. First, I apologise to the Committee for having been late; my excuse is probably the best I have ever been able to tender, because I have just been attending a meeting of pension trustees.
Lord Freud
We are in danger of sitting here devising IT systems, which is great fun but rather time-consuming. The word “awareness” is more than modest, because making people aware in the present IT environment is a substantial requirement due to the privacy around the data concerned. It would not be possible. I come back to my earlier point: in the new world of universal credit, the way in which that information is used will change quite dramatically and things may become possible. However, this is not the way to do it. In the present context, it is practical neither technologically nor politically.
Baroness Hollis of Heigham
Before I decide what to do with the amendment, which will be fairly predictable, perhaps I may ask the Minister a further question—again, it may reflect my failure to understand either the briefing papers or their import. Let me give him the example of a woman in a job where she earns more than £7,500—let us say £7,600—and is automatically enrolled. What would be her situation if she had a second job which gave her £6,000 a year, taking her above the LEL but below the ET, and she might or might not wish to enrol? Alternatively, she might have a second job which paid £4,000; that is, below the LEL. Could the Minister help me on that?
Lord Freud
I shall try to answer that, but I shall keep an ear open to those behind me.
Lord Freud
As I understand the situation, for the job paying £7,600, she would clearly be auto-enrolled. For the job paying £6,000, she would not, but she could opt in—it would be treated separately. For the job paying £4,000, she could opt in if she wanted to.
Baroness Hollis of Heigham
Even though one or two other employers were involved?
Lord Freud
The £7,600 would take her through the threshold. The additional incomes would be treated separately, because we do not aggregate. The £4,000 falls to a level at which she can make a contribution, although she would not get an employer contribution on top. That is how that would work. A thousand examples could be cited, but the basic rules remain.
Baroness Hollis of Heigham
Would she get an employer contribution on the £6,000?
Baroness Hollis of Heigham
I would be very happy for the Minister to write to me; I realise that I am throwing this example at him.
Lord Freud
Just to make it absolutely clear: the contribution is made above that trigger.
Lord Boswell of Aynho
My noble friend the Minister said that she would have nothing from the employer. I suppose, to be pedantic, that that would be so unless the employer chose to make a contribution, but there would be no obligation on the employer.
Lord Freud
Yes, I can confirm that, although we are going to be giving everyone their pension soon if we carry on giving examples.
Baroness Hollis of Heigham
To be clear—again, I am very happy for the noble Lord to write to me, because I realise that I have sprung this on him—I think that he is saying that, if a woman was earning £7,600, she would be automatically enrolled in NEST by her employer. If she had a second job which brought her in £6,000 and she chose to enrol, the employer would match it. So she would be running two NEST pots simultaneously.
Lord Freud
I do not need to write. I can confirm that. It does not have to be NEST. The pensions may or may not be NEST in each case.
Baroness Drake
If it was NEST, it would not be two pots; it would all go into one NEST account. But if the employer choice in each instance was a different pension scheme, by definition there would be two pots. To clarify on the previous debate, my understanding was that those earnings that came within the band—forget all other triggers—attracted an employer contribution. That is the critical thing. To get the employer contribution, the earnings must be in the band. If your earnings are below that band, you can opt in but you cannot trigger the employer contribution.
Lord Freud
That is exactly what I said, so I thank the noble Baroness, who is an expert in this area, for giving me the relief of not making a horrific solecism.
Baroness Hollis of Heigham
I think that where that takes us is that the woman in question would be getting information and contributions from two employers, in much the same way as would be the case if she were in mini-jobs which, if put together, would take her above the threshold. I accept the Minister’s point that at this moment in time this is a step too far for NEST to carry out. I genuinely understand that. As I say, we are putting down a marker. However, I am not sure that the size of the further step to take is as great as he originally suggested in the light of the exploration that we have had on having two streams of money going into possibly two separate NEST pots, according to whether one is default and the other is not. In order to handle that, we will need the IT on which one could build the push of my original amendment. None the less, this has been an extremely useful debate and I am grateful to the Minister, my noble friend Lady Drake and the noble Lord, Lord Boswell, for helping to clarify this issue. I beg leave to withdraw the amendment.
Baroness Greengross
At Second Reading, I stressed the point that one good aspect of the trigger was that it would help prevent employees and employers from making very small contributions. This is still an important point.
Lord Freud
My Lords, first, I thank the noble Lord, Lord McKenzie, for leaping into the breach and allowing us to have this debate on the issue about the trigger at which an individual is automatically enrolled being reduced. We are looking at the three amendments, together with the amendment of the noble Baroness, Lady Turner.
The reference to the potential move to the tax threshold is a really important issue that deserves a robust debate in its own right. We have an opportunity to debate it in later amendments. Rather than pre-empting that debate—in which I will make a commitment—I turn to the specific proposals in the amendment. We have committed to alignment with next year’s tax threshold of £7,475. This is the right direction of travel. However, we also need to retain flexibility for the future in order that we continue to target the right groups at the right times. I very much take the point of the noble Lord, Lord Boswell. There are quite a few issues that have to be looked at in the context of that debate. Let me put that to one side because we will be reverting to it. I apologise for the scars that the noble Lord, Lord McKenzie, bears. As a result of the level of uncertainty that exists in the structure of the pension system, we look to have rather more freedom of manoeuvre than he was able to enjoy.
This Government have always supported automatic enrolment into workplace pensions. We believe that it is the step change that will make a critical difference to a boost in retirement savings. However, we also believe that the new automatic enrolment earnings trigger is a significant improvement to the breakthrough in pension reforms that the noble Lord, Lord McKenzie, and so many other members of this and another place work so tirelessly to develop. Automatic enrolment for every individual into pension saving is not always the right thing to do. The key question is, and always has been, whether low earners would benefit from saving, as the noble Lord, Lord Stoneham, pointed out. It makes no sense to require people to sacrifice income during their working life and redirect it into private pension saving, when that saving makes them no better off.
The nub of this issue is about getting the right people saving. We, therefore, commissioned an independent review to ensure that the scope proposed for automatic enrolment by the previous Government was right. We wanted to look again at the point at which people should be auto-enrolled to ensure that we capture the right group.
Baroness Hollis of Heigham
Can the Minister help me? He said that we should not encourage people to save who would be no better off as a result. That was the line he used. What does he have in mind? If his right honourable friend’s new state pension of £140 comes into play, that problem should not arise, apart from for those tenants who might be on housing benefit—who may or may not be a diminishing minority. Have I misunderstood the Minister?
Lord Freud
I thank the noble Baroness for her intervention. Regrettably, she catches me at a time when I am not able to go as far as the Daily Mail, for instance, in saying what may happen as a result of discussions—which are entirely amicable—between the DWP and the Treasury in developing these proposals. Therefore, I cannot deal with her rather pointed query.
The Johnson review recommended that the personal income tax threshold of around £7,400 from this April would be the right starting point to trigger automatic enrolment. The latest announced pension and benefit rates bear this out. Persistent low earners get a higher replacement rate from the state, with means-tested benefits and the state pension, without private pension saving. This is clearly the other leg of the argument about whether it is attractive for low earners to save. From this April, the minimum annual guaranteed retirement income for a single person from the state will be around £7,140, with housing benefit on top of that. It is clear that individuals earning around this level during their working life can receive a similar income in retirement without saving. Therefore, it would be wrong to auto-enrol them. These amendments seek to introduce a lower entry point for automatic enrolment. This would mean encouraging a group to save who may receive more money in retirement from the state pension system than they earn during their working life.
There is an additional advantage to a higher earnings trigger that I would bring to your Lordships’ attention, which we believe will address a concern from pension schemes and employers. One of the persistent problems with the original design of automatic enrolment was to do with very small, low-value contributions on earnings just above the automatic enrolment point. We believe that the separation of the entry point from the contributions threshold creates a buffer against such small contributions. As a bonus, but not a driver, if we can settle on rates that employers already use, it would make the operation of payroll a great deal simpler.
We recognise that the increased automatic enrolment trigger has an impact on low earners at the point of automatic enrolment. However, we do not believe the effect is detrimental. The right people will be auto-enrolled and the lowest earners will not be. That is the right outcome. Critically, we have built in a safeguard. We support an individual’s decision to save where they feel that saving is right for them. Where someone below the threshold feels that they would benefit by saving, they can opt in to a workplace scheme. If they earn more than £5,715, they will get an employer contribution. We have just covered that ground.
I am acutely aware of the passions that the raised threshold has aroused. I am honoured to have taken part in such a robust and challenging debate. However, the automatic enrolment earnings trigger significantly improves the operation and the targeting of automatic enrolment. The new trigger ensures that the right people are encouraged to save. These amendments would encourage saving among a group of individuals, many of whom should not be saving. Therefore, we are unable to accept them and I ask noble Lords to withdraw them.
Baroness Hollis of Heigham
My Lords, may I ask the Minister a question? He rested much of his argument on this amendment, as with Amendment 16, not so much on the issue of small pots as the fact that people would get a replacement income in retirement sufficient almost to match their wage. Therefore, it is not worth their saving. I raised this in terms of its relevance to the basic state pension and whether it will lift people above pension credit. All the Minister’s assumptions are based on the belief that the household he is dealing with is a single-person household.
Lord Freud
I thank the noble Baroness for that intervention and that question. We have looked closely at this issue. She is absolutely right that many low earners are second earners and have partners. The trouble is that it is very hard to identify them with any precision, which makes it very difficult to encourage them to save, because many of them—we do not know which of them—would not find it beneficial.
The noble Baroness will make an argument, based on the discussions between the DWP and the Treasury, about what a single-tier pension would do to that position.
Lord Freud
She would make an argument to that effect, no doubt. However, how that would happen and its timing would be very sensitive, so it is simply not appropriate at this stage to make any presumption which would drive one into this very uncertain territory.
Lord McKenzie of Luton
My Lords, I thank all noble Lords who have contributed to the debate on these amendments. I had intended to say at the start of these deliberations on auto-enrolment, but forgot to do so, that we obviously have a number of challenges in some areas. However, we should make it absolutely clear, as I hope we did at Second Reading, that we thoroughly support the Government’s decision to proceed with auto-enrolment and with NEST. Those are hugely important developments to the pensions landscape. Whatever our challenges might be now, they need to be seen in the context of our fundamental support on that issue.
The debate has almost conflated two issues: the it-pays-to-save issue, which the noble Lords, Lord Stoneham and Lord Boswell, touched on, and the practical issues around having small pots, which the Minister relied on and to which the noble Baroness, Lady Greengross, referred. We need to unpick those. Perhaps I may refer noble Lords to the Johnson report in relation to the “it pays to save” argument. Page 30 states:
“This analysis raises significant questions about the validity of an annual earnings threshold of £5,035. Even at earnings substantially above this level, individuals see very high replacement rates from the State. Based on this analysis alone, we might easily argue that an earnings threshold of over £10,000 would be more appropriate to encourage the right individuals (those who actually need to save) to begin saving into a workplace pension. There are two key reasons to question such a conclusion. Firstly, earnings are not static. For many, earnings could change dramatically over their lifetime. For these people, saving for a pension whilst on relatively low income could be beneficial as it improves persistency of saving and increases income in retirement. Secondly”—
this point has already been made—
“many individuals live in a family unit. It is the circumstances of the wider family that are more important in determining whether it is appropriate for a particular individual to save”.
So on the “it pays to save” argument, the report seems to support the contention that an earnings band starting at the current primary threshold is the right place to be. It is in relation to the practicalities that the report argues the trigger. Separating the earnings threshold and the manner in which contributions are paid will help to reduce the number of small pots of pension savings, which are disproportionately costly. The smallest contribution going into a pension pot will be £130 a year.
The Minister is right: of course you can always argue that someone can opt in, but the whole purpose of auto-enrolment is to challenge the inertia which has undermined our pension system for decades; it does not really help with that pot. In any event, it picks up the point about persistency of savings. There might be small pots to start with but if people save persistently, even in respect of low income for a period, that builds up a pot which might not be insignificant. However, using arguments about practicalities and small pots seems potentially to punish the wrong people, as we are saying that some 600,000 people are not going to benefit from auto-enrolment because we do not want to handle small pots. NEST was created, in part at least, to handle that very issue. There are questions about the profitability of the pension sector and pension providers, and there is a balance to be struck in all of that.
Therefore, I very much hang on to the point that the argument for the trigger seems to be based overwhelmingly on the question of the practicalities of dealing with small pots. It does not fully address “pays to save” and the question of whom we should be encouraging to save.
Lord Freud
Perhaps I may respond to the noble Lord on that and make absolutely clear the arguments that we will be taking from the Johnson review. It said that you needed to look at three things: replacement rates, earnings dynamics, and family make-up and characteristics. Looking at all three of those, on balance the recommendation was for a higher threshold of roughly £7,400, the reason being that it got the right people saving. That must be the core argument, along with the practical argument relating to costs. It is very expensive to manage small pots. The economics of running a NEST operation, let alone other operations, where it is important to get costs down, is an important secondary consideration. However, the primary one is to get the right people saving. After all, this is, as I have said previously, the biggest experiment in asymmetric paternalism. Let us get it right first and fine-tune it later.
Baroness Hollis of Heigham
How can the noble Lord know whether it is right if he cannot establish the family circumstances which, as my noble friend rightly said, determine whether it pays to save?
Lord Freud
My Lords, we are all using the Johnson review as a basis. It recommends that higher threshold and we are following that. It is straightforward and has been well argued. It is a review that has been well accepted across the political and industrial spectrum, and that is the basis on which we are making this change.
Baroness Hollis of Heigham
That is a very interesting contribution and I hope that the Minister will follow it up. I want to put to the Minister a very simple but not obvious point. I understand why employers prefer a waiting period—obviously one is glad that it is not two years, as in some conventional schemes—but even with three months we must recognise that, given the figures on job turnover on page 103, with which I am sure the noble Lord is familiar, the median number of jobs that men and women have is 11. My previous research shows that the pattern of job turnover is different for men and women: men have more turnover in their earlier years and settle in their 40s or 50s, while women have a higher job turnover than most men by virtue of being much more frequently in and out of the labour market and more likely to re-enter into a different job. The report makes the point—although it does not back it up with research—that statistically there is not that great a difference between the two. It is worth pointing out that if somebody has 11 job changes, which is the median according to the report, having a three-month waiting period represents three years’ loss of pension contributions. Interestingly, 26 per cent of the population on this model have between 12 and 15 jobs in their working lifetime, which would mean, on average for them—if my sums are right—a loss of five years’ pension contributions. Furthermore, 15 per cent have 16 jobs or more—up to 23—which would be an average of something like eight years’ loss of pension contributions.
This is highly significant. Even reducing that by one month to two months would help; reducing it back to one month, as my noble friend has argued, would make a significant contribution for those who have staying power but none the less a rapid job turnover for whatever reason. It may be because of a cycle between self-employment and employment—take a hairdresser, for example, for whom the conditions of employment are often very obscure, whether you are self-employed or, even if you work in a salon, whether you are employed or not. None the less, the waiting period of three months can represent over your lifetime a significant loss of working contributions matched by the employer into your pension. For that reason, as well as others adduced so far, I hope that the Minister will reflect on whether he could make any movement in this direction.
Lord Freud
My Lords, Amendment 23 would reduce the maximum length of the waiting period from three months to one month. Amendment 24 applies an exception so that existing employees have a three-month waiting period. However, based on previous discussions with the noble Lord, our interpretation is that Amendment 24 is intended to apply an exception so that new employees would remain eligible for a three-month waiting period. I know that we are in Committee and so one can refine the intention of an amendment to make it more precise, but that is our understanding of its intention.
Clause 6 introduces the concept of an optional waiting period to the automatic enrolment process. Automatic enrolment has made numerous appearances in this place and another place. A recurring theme has been the extent of the duty placed on employers. I preface my remarks by putting this in context. We are talking about auto-enrolment for pensions—the biggest experiment in asymmetric paternalism that the world has ever seen, I think. We are trying to encourage people to save. We forget that the encouragement comes in the form of automatic enrolment. Let me say in response to both my noble friend Lord Boswell and the noble Baroness, Lady Hollis, that if we overcomplicate this, we will not have a smooth-running system. Auto-enrolment is a means to an end. That end is for the norm to be for people in the country to save more.
The noble Baroness cited the median figure of 11 jobs over a lifetime. If that is the median, the noble Baroness is right: 33 months represents 7 per cent of the provision of a potential pension pot. However, if auto-enrolment has worked and people have started opting into pensions, by the time they are on their second, third or fourth job, they will opt in because it will have become a habit. One must look at what auto-enrolment is, rather than become overly mechanical about it, which these amendments are.
The aim here is to ease the burdens on business. This simplification measure of pulling two systems into one—to get rid of postponement and to have one system of waiting periods—has been widely welcomed by employers. A waiting period will free employers from the administrative burden of enrolling casual staff who are working for them for only a few weeks and wish to maximise their take-home pay, rather than save for a pension. I am thinking of most of Sydney in Australia when I make that remark; I think that most people in Sydney come to work in London for two years.
Lord Freud
A waiting period will also allow employers to align automatic enrolment processes with their existing processes and avoid part-period calculations of contributions. In addition, it will allow them to stagger auto-enrolment of large workforces. An employer will be able to apply a waiting period to all employees at their staging date. It will also be possible for an employer to apply a waiting period when a new employee joins the workforce or from the date when an employee becomes an eligible jobholder—for example, when they turn 22.
It is important to note that an employer will be allowed to apply a waiting period only if he gives the worker information about the waiting period within a certain deadline. This will ensure that workers are informed of their right to opt into pension saving during the waiting period. It is only right and fair that those who wish to start saving for retirement earlier are not prevented from doing so.
The waiting period is intended to ease the administrative burden and has been widely welcomed by employers. However, it means that, for those individuals who have frequent job changes, there could be a significant impact on their overall pension savings. This is particularly so, as the noble Baroness, Lady Hollis, pointed out, if they are subject to a waiting period in every post. Allowing individuals to opt in during the waiting period will address this imbalance so that no one is denied the opportunity to save. As I said, if auto-enrolment has the impact that it should have, the psychology of saving should change for many people.
Noble Lords will be pleased to hear that much of the detail is on the face of the Bill. We propose taking regulation-making powers in just two areas. First, we will specify in regulations how quickly the employer must give notice to the individual about the waiting period. Secondly, we will set out what information that notice must contain and any other accompanying information that the employer must provide. For example, workers will need to be provided with information about the right to opt in during the waiting period. It is important that we have the flexibility to set the period and to provide for additional accompanying information in regulations once we have had an in-depth consultation with our stakeholders.
As I said, a key aim of the reforms is to encourage more people to start saving for retirement. However, at the same time, we have been mindful of the costs for employers of implementing the reforms. We believe that a three-month waiting period provides the correct balance between easing employer burden and maximising individuals’ savings. This amendment introduces a variable length of waiting period depending on the circumstances. There are two main issues with such an approach. First, introducing a one-month waiting period for existing employees would remove some of the flexibility afforded to employers through waiting periods; for example, they would not be able to stagger automatic enrolment of large workforces. Secondly, we are keen to ensure that the introduction of waiting periods does not make the automatic enrolment process more complicated. We believe that a simple process is key to employers understanding and preserving their support. A two-tier waiting policy would add complexity and would be difficult for employers to understand or use. It would add to the burden on employers, which is not the intention of waiting periods.
Waiting periods were designed with employers in mind and have been welcomed. We believe that they will provide a real easement for employers, as well as ensuring that individuals’ savings are protected. I urge the noble Lord, Lord McKenzie, to withdraw the amendment.
Lord McKenzie of Luton
My Lords, of course I intend to withdraw the amendment. I thank the noble Lord, Lord Boswell, and my noble friend Lady Hollis for their participation. The noble Lord, Lord Boswell, made an interesting point about recyclable employees effectively coming back in one form or another. My noble friend Lady Hollis emphasised the issue of what this could mean in terms of savings for people who are perpetually caught up in this deferral. We accept the point about some flexibility on the alignment of processes. This does not seem unreasonable. I also acknowledge that there may be some amelioration of the lost savings years; if people are perpetually caught up in this, opting in may catch on. However, we know how damaging inertia around pensions has been, so that could not be assured.
With respect to the noble Lord, I do not think that he dealt with the point about the original provision in this clause, which I understood was there to be an incentive for good provision and to give people some extra leeway in their easement. This seems to have gone and, in effect, been replaced by a sort of blanket easement. Although I will not convince the Minister, I also hang on to my point that, if the fundamental easement for employers—and I understand that they would welcome this—is that it helps them with the problem and administrative costs of the coming and going of short-term employees, and if, as I accept, a three-month waiting period is needed to address that, why on earth should it be applied to somebody who has been employed for months or years who reaches the age of 22 and becomes a jobholder? There is no logic to the position. The employer will know the track record of that individual, yet they are being treated exactly the same as somebody who has just walked through the door. If the proposition is that you need a waiting period to deal with short-term employees, I still do not understand why you need to have it for people who have been employed for many years and who simply, by virtue of their age, become a jobholder.
Lord Freud
I tried to explain that. There are a few things happening here but the relevant thing is to try to allow people with large workforces to time it so that they can do things in bulk rather than having to individualise. That will allow us to get a single system running through rather than having to have separate systems. Administrative simplicity has been the guiding goal here and it is also the reason why we have abandoned the concept of postponement, which was again a slightly complicated two-tier system. We are trying to get to one tier and a great deal of administrative simplicity.
Baroness Hollis of Heigham
The Minister has already, and I am glad that he has, sold the pass on that by allowing voluntary enrolment for young people under 22 or for people, mostly women, earning between £5,200 and £7,500. The employer is already going to have to identify and respond to particular individuals rather than to cohorts of a labour force that may be moving tidily through the system. While we welcome the concession of voluntary enrolment, the noble Lord cannot now pray for administrative simplicity in cohorts when he has already sold the pass on voluntary enrolment.
Lord Freud
There is a great deal of difference between having a system that allows opt-in at any stage compared to a system that puts an obligation on an employer to do something at one month for some people and three months for others. There is a difference and I would not agree that any pass has been sold on this.
Lord McKenzie of Luton
My Lords, this amendment is very straightforward and simply seeks the publication of an annual monitoring report concerning the deferral provisions provided for in Clause 4. Noble Lords will have gathered from our earlier discussion that we have considerable concerns over these provisions and how they will be applied in practice, and whether their application will deter individuals from auto-enrolment. We are not prescriptive about the detail of the report or its timing but we need to be reassured that any provisions are working fairly. As I understand it, there is no requirement for all employees to be treated in the same manner under these provisions and therefore we need information about how this is working in practice. So the intent of this amendment is clear. There needs to be some process of reporting so that we can understand in practice how these provisions are working. I beg to move.
Lord Freud
My Lords, I thank the noble Lord, Lord McKenzie, for this amendment. As he has pointed out, it would compel us to publish a report every year on the implementation and impacts of the waiting-period provision under Clause 6. As we have just discussed, Clause 6 introduces the concept of an optional waiting period into the automatic enrolment process. We agree that the effects of the waiting period should be monitored. We have made a commitment to fully evaluate the effects of the reforms and how they are delivered. This will include a proportionate check that the legislation is operating as expected for individuals, employers and the pension industry. As part of this, we intend to monitor employers’ use of waiting periods and the effects on workers’ savings. It is important that we retain the flexibility to design appropriate methods and processes for this evaluation in response to changing circumstances. For example, our decisions about who we survey, how and how often may change over time.
Our plans for monitoring the progress and impacts of the reforms will be set out in a detailed evaluation strategy which we plan to publish this year. We also intend to publish key findings from our evaluation. We therefore feel that there is no need to legislate specifically to ensure monitoring of the waiting period provision, and that to do so may unintentionally constrain us from adopting the most appropriate approach to evaluation in future. I therefore urge the noble Lord, Lord McKenzie, to withdraw this amendment.
Lord McKenzie of Luton
I thank the noble Lord for his response. I was reflecting on how many times I have deployed exactly those same arguments in his position. I am not sure that they grow more convincing. However, I understand and am grateful for what the noble Lord said about an evaluation process. I understand that the strategy will be published later this year; we will see what sort of timeframe is attached to that. I am grateful for that and, accordingly, I beg leave to withdraw the amendment.
Baroness Drake
My Lords, I express my support for the sentiments and views of the noble Lord, Lord German, in moving this amendment. I, too, noted the Minister’s comments on regulation on this matter. As we move nearer to the commencement of auto-enrolment in 2012, I am also conscious that both the Department for Work and Pensions and the pension regulator will need to prepare for a major programme of communication and guidance to workers and employers. Can the Minister assure us that sufficient funds will be made available for this scale of communication and guidance programme? As the Minister said, this is the biggest ever example of asymmetrical paternalism, and, given the constraints on public expenditure, the old phrase about not spoiling the ship for a ha’porth of tar, is extremely important in this instance.
I, too, agree with the noble Lord, Lord German, that, if individuals are to be given the right to opt in during the deferral period, it has to be a meaningful right, understood both by the employer and by the employee. A meaningful right to me means three things: do you know you have it; do you know how to exercise it; and do you not suffer a detriment in exercising it? That is quite important if the three-month waiting period is to have integrity for the reasons given as to why a three-month period is needed and the individuals none the less can opt in. It is quite important that guidance and culture meet those three requirements. I hope there is guidance to both the employer and the employee that makes the opt-in opportunity meaningful.
Lord Freud
My Lords, I thank my noble friends for this amendment, which would require us to make sure that guidance is issued to employers and jobholders explaining their rights during the waiting period under Clause 6, including their right to opt in. Let me try to describe what our plans are in this area and explain why putting it in the Bill could potentially be counterproductive. We aim to specify in regulations how quickly the employer must give a notice to the individual about the waiting period. We will also set out in regulations what information that notice must contain, and any other accompanying information the employer must provide. In particular, this will include information about the right to opt in during the waiting period.
We recognise the need to provide certainty as quickly as possible, as my noble friend Lord German pointed out. We intend to put out the draft regulations after what we call a “soft consultation” period in April. We intend in this way to inform employers of the requirements around waiting periods as soon as possible. To use the waiting period provision, employers will have to provide information to individuals about their right to opt in. It is essential that employers understand the operation of the waiting period and their obligation to provide information to affected workers. That will be done through the Pensions Regulator, who is developing clear guidance for employers explaining their duties under the reforms and including information about the waiting period. The Pensions Regulator plans to publish the guidance in the current year.
Lord McKenzie of Luton
My Lords, the noble Lord, Lord German, has raised an interesting point, which I hope the Minister can clarify. I assume that the situation is that, if you have got to month 3 and you do not have qualifying earnings, there is nothing at that point to trigger automatic enrolment. When you next have your qualifying earnings is presumably when you would be automatically enrolled. Certainly, if you had to start again, that would add injustice to something about which we are already not very happy.
Lord Freud
My Lords, I thank my noble friend Lord German for this amendment, which would restrict an employer to using one waiting period per worker and would ensure that automatic enrolment would take place once a worker’s earnings had reached the earnings threshold for three months, whether those three months were consecutive or not. Thus the single three-month waiting period could be accrued over a far longer period of time where the individual’s earnings fluctuate. I should take this opportunity to clarify for the noble Lord, Lord McKenzie, how it would actually work. If you had low earnings for the first two months and hit the target at the third month, you would be auto-enrolled. However, if you did not hit it in that third month, you would effectively be back to your dinner problem and have to start again. That is how it would work.
As I explained, Clause 6 introduces the concept of an optional waiting period into the automatic enrolment process. This is central to our commitment in this Bill to rebalance the administrative burdens on employers while ensuring workers’ access to pensions saving. The waiting period is designed to meet employers’ requirements by being simple and easy to understand and use. This is clearly crucial to its success. At the point at which the employer applies a waiting period, they will not be required to undertake a check on whether the worker is eligible for automatic enrolment. The employer must check eligibility at the end of the waiting period and we are keen to avoid them having to check it twice or more.
The waiting period consists of a single block of time, regardless of whether the individual’s eligibility for automatic enrolment fluctuates during that period. If the worker satisfies the automatic enrolment eligibility criteria at the end of the period, they will be enrolled into the employer’s scheme on that date. If not, the employer will monitor the worker’s status until they satisfy the eligibility criteria. At that point, the employer may apply a further waiting period if they wish. It need not be for the full three months.
We recognise my noble friend’s concern that workers with fluctuating earnings could miss out on pension saving due to the use of multiple waiting periods. While it is difficult to estimate the likelihood of this occurrence, our analysis suggests that few people are likely to have fluctuating earnings around the level that they traverse in and out of automatic enrolment eligibility. Are we, therefore, devising something very complicated for a problem that is pretty small, which is what our analysis suggests? It is also the case that, for those on sustained low earnings throughout their working life, state benefits can replace most income in retirement. Common sense suggests that it would not be rational to lever such people into private savings. It is important to remember that they will have the right to opt in at any point during the waiting period.
This amendment would add a substantial additional burden and complexity to the waiting period process and would not be easy for employers to understand and use. It would require the employer to monitor an individual’s automatic enrolment eligibility continuously throughout the waiting period and to keep a record of the period of eligibility accrued during the waiting period.
Employers requested the waiting period as an administrative easement. To make the process so burdensome would negate its value. At this stage, it is crucial that we get the reforms bedded in and that we ensure that employers find it easy to comply with these new duties. It is therefore critical that the processes are simple for employers to understand and use. In the absence of any persuasive evidence of a problem, we feel that it would not be right to introduce greater complexity and a significant burden to a process whose very purpose is to offer administrative easements to employers.
I offer noble Lords my assurance, however, that we are committed to fully evaluating the effects of the reforms and how they are delivered. As part of this, we intend to monitor employers’ use of waiting periods and the effects on workers’ savings. I urge the noble Lord to withdraw this amendment.
Lord German
My Lords, I am still a little confused over the explanation. I understand fully the point about somebody hitting the relevant target in the third month. However, my question was the other way round—where someone hits the target in months one and two but does not hit it in month three. In seasonal worker terms, this could happen if someone was picked up and employed in May, perhaps worked through May, June and July and found a bad—wet or something—August, for which they could not get the money in. The important issue is simplicity but also understanding. It may be that a three-month period applies, but it was not absolutely clear from the Minister’s reply when, once you have a first waiting period, the second test would occur. What if you fail to meet the criteria that he has just described in that first three-month period? You will then need to have another piece of information made available to the employee to say, “You have not quite done it but this is the way you go next”. It seems to become far more complex if you cannot have it in some way accumulatively worked out. I will obviously withdraw the amendment. However, I hope that the Minister will come back at some stage with some further explanation of the anomaly of the people who are in the position that I have described, in which they pass the threshold in months 1 and 3 but not in month 2, yet wish to maintain their position within the company.
Lord Boswell of Aynho
My Lords, before the Minister responds, perhaps I may briefly share with the Committee a slight concern that I have, which is very much subsidiary to the powerful point that the Minister has already made about the need to maintain simplicity and make the scheme doable by employers. Behind earlier remarks that I made, which I shall not rehearse, concerning agency work and self-employment, and behind the slight concerns that I have here is an anxiety about employers who are perhaps less well intentioned than those of us who were employers had hoped to be. Therefore, I stress to the Minister that it is extremely important that we monitor any devices that are used, in effect, to subvert these waiting periods. The Minister is absolutely right to introduce them to simplify the scheme but, at the same time, we need to come down very hard on people who use them as an opportunity to avoid their obligations.
Lord Freud
My Lords, I thank noble Lords for their observations and repeat how the structure works. The cycle would be starting again. However, I emphasise that we think that the group involved would be extraordinarily narrow. We could overcomplicate this issue, because in practice many employers will probably just enrol those people the following month, which they are quite free to do. They can opt in. As I said, we will be monitoring this very closely. If it becomes a substantive issue and we can see some peculiar games going on, we will have to move in and sort it out, and we will do that.
Baroness Hollis of Heigham
I should like to reinforce that. I was struck by the point made by the noble Lord, Lord Boswell. When I was doing some pension work on things such as buy-back and so on, I was struck by the number of women in a variety of jobs who told me that their employers very deliberately capped their hours at 15 to avoid national insurance. I am afraid that I can see very small employers—whether they run a launderette, a newsagent or whatever—having people working for them for two months, laying them off for a week and then starting them in work again. They could, for possibly quite a long time, avoid automatic enrolment and therefore avoid paying a pension, which they would be reluctant to pay because they would regard it as a burden on their business. I have no idea how many small employers might abuse the system in that way, if I can put it like that, but I fear that among small employers there will be quite a strong incentive to do that. I wonder how the Minister is going not only to watch that but to remedy it.
Lord Freud
My Lords, I thank the noble Baroness, Lady Hollis, for that point. Clearly, in all these areas there is potential for abuse. However, it is very important that we do not overcomplicate the system in case there is abuse, which in this event is likely to be rather small. If, as the noble Baroness fears, it does become an abuse, we will be monitoring it.
Lord Freud
I have given a commitment that we are going to monitor how all this works on a regular basis and I feel confident in saying that, if we find that it is a genuine problem, we will have to move in. However, it is pointless to try to pre-empt something that looks as though it is too small an issue to be concerned with.
Baroness Hollis of Heigham
I do not understand how the Minister can monitor the difference between the two months and the week’s lay-off, be it in the hairdresser’s shop or anywhere else, in order to restart the dinners as it were, and the non-occurrence of voluntary enrolment. I do not understand how the Minister can ensure that the person not joining the pension scheme is in the latter category and not in the first. I do not see how he will monitor it, because he will not keep the records.
Lord Freud
We have committed to monitor this situation quite widely, in particular how the waiting periods are working. It is essential to get it right. We have not developed the specification of that monitoring, but we will do so. We will watch closely that and other issues.
Baroness Drake
The three-month waiting period gives rise to concerns over bad employers. However, on the monitoring point, the Pensions Regulator has an obligation to monitor and look for non-compliance. One of the ways in which they will do so is by looking at the number of employees in a firm who have been auto-enrolled, because they will at least get a sense from the numbers involved whether there is a flashing red light over compliance. The problem is that the Pensions Regulator will focus on where the biggest risks are and look at the bigger employers first. If the compliance hazard is around small employers, there has to be discussion with the Pensions Regulator, because compliance monitoring is resource-intensive. Even if one was running the argument that the problem can be picked up in compliance monitoring, the requirement on the regulator to be risk-focused and therefore to target where they think the greatest non-compliance issues would be, or to get scale of coverage on non-compliance, could be a problem.
Lord Freud
I repeat that we are committed to looking at waiting periods and there is a general duty on the Pensions Regulator to look at compliance. If we suspect any kind of systemic abuse, our aim will be to find it in our monitoring. For example, we might look at it from the other end and survey individuals, perhaps those in the low-paid environment, who are at risk. However, this is an issue that we are alive to, and this debate has made us even more so. I therefore need to thank the noble Lord for raising it.
Lord German
My Lords, I would normally be swayed by the persuasive eloquence of my noble friend the Minister, but the more that I ponder the issue, the more it seems to me that there are routes for escape that do not err on the side of the rights of the employee. My amendment proposes a simple solution: that, in relation to the threshold, the three months of the waiting period should be cumulative. It is as simple as that. It would then be quite easy for a jobholder who believed that they should be enrolled to prove it, because the information would be there in front of them. We are going into a cycle of repetition. On this issue, I am afraid that I am not quite as convinced as I should be by the Minister’s argument—although I am convinced that he will reflect on it further, because the discussion around the Committee has raised more questions than answers.
The whole point of the auto-enrolment process is to challenge inaction, to get people saving and to make it the right thing for everyone to do, both employers and individuals. In withdrawing the amendment, I express the hope that my noble friend will reflect on the words that have been spoken around the Committee today and perhaps give us some sense of security when he comes back with any further changes that he wishes to make to the Bill at the next stage.
Lord Freud
Perhaps I could just interrupt. What I have not made adequately clear, for which I apologise, is how big this problem might be. The universe of people who earn between £7,000 and £7,475 is 140,000 people, so we are talking about very small numbers. Moreover, they would have to be fluctuating at the wrong time. We could be setting up a very complicated system to look after a very small number of people. We cannot quantify this exactly but I give an order-of figure to give noble Lords a feel for it. We are talking about between 8 million and 9 million extra people going into pensions, so this may be just too much of a burden relative to the potential number of people whom we are protecting.
Lord McKenzie of Luton
Will the Minister just help me on one point? I do not want to prolong this. If the complexity he suggests arises from the need to monitor cumulative earnings over a two-month or three-month period, I can accept that, but we do not need that. If we just had the proposition that somebody waits for three months and if at the end of three months they do not have qualifying earnings and are therefore not auto-enrolled, you simply roll them on to the next point that they do have qualifying earnings. You put them in the pot the same as anyone else. Is that not a simpler system than having an alternative system whereby you have to see who has been previously deferred and had a waiting period and keep the clock running on them individually? I would have thought the simpler system was not to have to take account of cumulative earnings but, once you get past that three-month period, simply to check, as you would have to for everyone, whether they have reached the age of 22 or qualifying earnings, et cetera. There is quite a lot of disquiet around this. We are not trying to be difficult. I urge the Minister to take this away because I see it as something that could be brought back on Report.
Lord Freud
My Lords, I can see when I am up against the wall. I am not completely insensitive. I will look to see whether there is some simple fix and, if there is, I will write to noble Lords. However, it would have to be very simple, because the risk/reward in terms of burden versus people who are at risk is just on the wrong side. It does not seem to add up to me.
Baroness Turner of Camden
My Amendment 33 is in this group. I was prompted to table an amendment to this clause by the TUC. It wrote to me to point out that the trigger of £7,475 at 2011 is in excess of the national insurance threshold, which at present is £5,715. It points out that that is likely to affect a number of part-time workers, mainly women. They are the majority of those earning between the NIC limit and the personal allowance. The TUC believes that if the Government were to take forward the proposals, which they have voiced, to raise the basic personal tax allowance, the numbers excluded from auto-enrolment will grow. We have all said that we are in favour of auto-enrolment, and that we want to get as many people auto-enrolled as possible because they will then get the benefit of the employer’s contribution. As the gap between the contribution and enrolment thresholds grows, there is a danger of a sort of cliff-edge and that the newly auto-enrolled may decide to opt out as they see a noticeable chunk of their earnings going in pension contributions.
There may be various other ways of dealing with it, but the gap is not a good idea. It tends to make the whole thing less simple. People are caught up in the gap and do not receive what is intended to be of benefit to them, which is auto-enrolment. I hope that the amendment moved by my noble friend Lady Drake receives favourable consideration by the Government because there is a serious point to be made. I shall not press my amendment.
Lord Freud
Uprating and revaluation measures, especially for pensions, can be challenging to get right and hotly debated. The uprating arrangements for automatic enrolment are proving no exception. However, before going into those arrangements, I need to make clear to the noble Baroness, Lady Drake, that nothing in the Bill introduces a power to change the age criterion of 22. The flexible uprating power in Clause 8 applies only to the earnings trigger and thresholds. It does not apply to age criterion. We agree with her that 22 is the right age for automatic enrolment to kick in.
Lord Freud
All this is saying to me that, right now, uprating measures for entry and savings levels need to be flexible. Therefore, we want to maintain flexibility to consider a wide range of economic measures. Pensions cast long shadows. Pension law has to last for the long term. We believe it is prudent to build in maximum flexibility for all eventualities, as regrettably we do not have 20:20 foresight.
I sympathise with the intention behind the amendment and I understand the concerns about any unfettered discretion or an unrestrained dash to a £10,000 trigger. However, the primary aim here is to ensure that we target the people who should be saving, while excluding those who should not. If, at the same time, we can align with a threshold that employers are already familiar with and minimise administration burdens, so much the better.
Automatic enrolment has to be sustainable. My worst fears are that we set rules which scoop up people who cannot afford to take a hit on their pay packet. If we get the trigger wrong—if we set it too low—we risk high levels of opt-out. Once we do that, we turn people off pension saving, even if we have applied asymmetric paternalism to get them to save. To get the trigger right, we need flexibility.
Today’s debate is further ample evidence that the automatic enrolment earnings trigger is a matter of deep interest and concern to this House. For that reason, we want to ensure that the House has an ongoing opportunity to debate this issue. We recognise that including such a flexible power to amend figures that appear in primary legislation represents a very broad power, and that is why the uprating order will be subject to an affirmative resolution procedure. It will mean that this complex issue, and the exact rates set for the launch of automatic enrolment, will be the subject of a full debate to ensure complete transparency.
It would be unusual to commit to an impact assessment in the Bill, as requested by the noble Baroness, Lady Drake. However, I make a commitment to provide an impact assessment for the next five years, up to the 2017 review and shortly afterwards. This will allow time for the reforms to bed in and for us to understand the wider landscape. Therefore, there will be full information on the uprating order as a basis on which the House can conduct the debate.
I hope that I have been able to set out the case for flexibility and the need to future-proof these provisions. I also hope that I have provided the reassurance on transparency that noble Lords are seeking with their request for an impact assessment. However, I regret that I cannot give a guarantee that the trigger for pension saving will in future be set in complete isolation from prevailing personal tax thresholds. I am afraid we are unable to accept the amendments and I ask the noble Baroness to withdraw this amendment.
Baroness Drake
I thank the Minister for his response but I am not persuaded by his arguments to feel confident. I come back to the point that I made in moving the amendment: the UK has a history of making what it feels are good incremental adjustments to the design of the pension system for short-term considerations. Inevitably, 10, 20 or 30 years downstream, there will be a sub-optimal outcome in the strategic sense, and there will then be a rush around to try to find plasters to deal with that. I worry that the ease with which the earnings threshold could be raised so significantly is a potential example of the same error being made in the future.
The Minister said that the Government wanted to retain flexibility. I do not think that I am arguing about the Government not retaining flexibility; I was seeking to put a limit on the extent of that flexibility that can be addressed through an order, because I think that the threshold for earnings is so significant. The Minister said that he had listened to employers and pension providers. That is good, because employers are very important in this new settlement. However, there are also consumers and citizens whose views and interests in this matter are equally important. These reforms represent a contract with citizens, whereby the Government are expecting them to take greater responsibility for providing for their own income in retirement, and also for removing the state from any responsibility for any earnings-related second-tier provision. It is therefore very important that the employers’ views are engaged because they are part of the tripartite delivery of this. I do not demur from that at all. Equally, the view of the citizens, or those who are able to speak for them, is also to be represented. Something as significant as the trigger for the earnings threshold will be very important for them and for the outcomes of their saving activity.
In the amendment, we were seeking to give the Government the flexibility which at least kept broadly constant the proportion of the population covered by automatic enrolment, with some degree of variation either way. But if there is to be a major change in the threshold, I do not believe that that should be done by an order—even by an affirmative order. It is of such significance to the outcomes to the pension reform programme over time and there should be a high level of awareness of the consequences. People should understand the impact and all interest groups should be involved in that decision.
The Minister referred to a possible change in the state pension system in the future. Speculating, the change will be accelerating the flat-rating of the state second pension and integrating and bringing forward the two into a replacement single state pension. Presumably that would strengthen the argument that raising the earnings trigger, other than by reference to earnings or comparable situations, should not be raised significantly.
I remain concerned because the arguments deployed by the Government for wanting to retain the level of flexibility that will allow them to raise the earnings trigger so high are not very persuasive. I beg leave to withdraw the amendment.
Baroness Turner of Camden
My Lords, I support the notion behind these amendments. At Second Reading I drew attention to the possibility of people arriving at retirement with lots of little pension pots and not knowing what they would be entitled to. That sometimes happens now; people phone up and say, “Am I in your pension scheme? I just don’t know”. They reach retirement and, if they have been working for around 40 years, they do not know what they have. It seems sensible to have some mechanism whereby one’s pension entitlement is, as it were, collected as a cumulative amount of money. People would then know that they have access to this cumulative amount and the pension that is generated from it. In this sort of system we have the opportunity to do something like that. It would be a very good idea and I congratulate my noble friend Lady Hollis on what she has come up with in Amendment 35. The noble Lords, Lord Stoneham and Lord German, certainly had something similar in mind with Amendment 34. The notion is a good one, whichever amendment is acceptable to the Government.
Lord Freud
My Lords, I must start by declaring an interest. I think I have one of these infuriating little stranded pensions. It is the most annoying thing. You look at the file, look at the headline and close the file because dealing with it is unendurable. I am far too polite to complain to the noble Lord, Lord McKenzie, for not doing anything about it. If I thought about it I would resent him deeply every time I looked at the file.
I take the opportunity to let the Committee know, through these amendments, what we are doing to consider how transfers across the industry, particularly of small pension pots, can be made easier. The Making Automatic Enrolment Work review, carried out last summer, recognised that facilitating transfers was critical to the success of the workplace pension reforms. It believed, however, that the issues went beyond NEST. When automatic enrolment becomes the norm, there is a much higher risk that pension savings, particularly for lower earners and people who move jobs frequently, will become fragmented in several small pots—a point made so eloquently by the noble Baroness, Lady Hollis, just now.
The Government are already acting on the recommendation of the review to consider how transfers across the industry can be made easier. The DWP is working alongside the Treasury, HMRC, the Financial Services Authority, the Pensions Regulator, employers and pension providers to understand better the burdens employers and schemes face when administering small pots, and to identify any barriers facing members.
In addition, the DWP recently published—on 31 January—a call for evidence on the regulatory differences between occupational and workplace personal pension schemes. We are seeking to address existing rules which could impact on the success of the reforms, such as rules on early scheme leavers and disclosure. The call for evidence is likely to consider actions better to manage small pension pots. This call for evidence closes on 18 April. Our response will be released later this year after we have considered stakeholder views and evidence of burdens and costs.
Her Majesty’s Treasury recently held a call for evidence on early access. This reflects the Government’s commitment to consider ways to boost individual saving and to foster a culture of personal responsibility over financial choices, particularly in encouraging saving for retirement. The document sets out the available evidence on early access to pension savings, some potential models for early access and the potential benefits and risks, and sought further evidence from interested parties. It included a specific question on ways to improve the transfer process and on whether there is a case for introducing further flexibility in the trivial commutation rules. The call for evidence closed on 25 February. HMT is currently considering the responses and will publish its findings in due course. So, across all three of these areas, we are seeking to identify options to improve transfers so that individuals can get the most out of their savings.
I appreciate the interest that noble Lords have indicated in the overall issue of transfers, which is much wider than the restrictions that are currently placed on NEST. The restrictions on transfers into NEST are intended to focus the scheme on its target market, particularly as the reforms are staged in, enabling its administrative processes to be simple, leading to lower running costs and creating safeguards against levelling down. NEST can already accept certain transfers in—for example, where a member with less than two years’ service has the right to a cash transfer. This allows jobholders who move from an employer not using NEST to one offering NEST to transfer their cash transfer sum into NEST. The Pensions Act 2008 commits the Secretary of State to review the effect of NEST transfer restrictions in 2017. But we are doing work now, before 2017, that will bring together evidence and analysis from a broad base.
As I know noble Lords appreciate, there is no straightforward solution and the outcome of any quick fix may not provide the universal remedy for individuals and pension schemes that we might hope for. Aggregating small pots by transferring them into another pension scheme is not necessarily a good thing to do for individuals, as the noble Lord, Lord Flight, just pointed out, as it will depend on the merits—the risk, charges and growth—of the fund they are transferring into compared to those of the fund they are transferring from. It is not necessarily a good thing for pension schemes either, which, though they would no longer need to pay for the maintenance of a potentially smaller pot, would need to pay to transfer the fund out. Hence, the work we are already doing to see what measures we can sensibly take to minimise industry burdens while delivering the best possible protection of individuals’ retirement outcomes. We want to ensure that any solution will stand the test of time and meet the needs of all pension schemes and their members.
I do not want to prejudge the outcome of our considerations, but I can see the merit in a number of your Lordships’ arguments, including that of the noble Lord, Lord Boswell, that we should take into account giving the individual a choice, where they have very small pension funds, to take the cash. It is, of course, the very smallest pots that cause the biggest problems, as even if transfers can be facilitated, the frictional administrative costs have a proportionally higher impact. The noble Lord talked about sums of £20 and £30—I shudder to think of the proportion of administrative costs involved in doing anything with them.
Our ambition is that NEST will complement rather than replace existing good-quality pension provision. Changing the provisions now to allow NEST to accept transfers in during the critical implementation period could undermine that aim. By 2017 the reforms will have been fully implemented. We will have more evidence on the effect of the reforms as a whole, including the impact of NEST on the market. While I appreciate the principle behind these amendments, I urge the Committee to bear with us while we get to the heart of this difficult and complex matter. On that basis, I urge noble Lords not to press their amendments.
Baroness Hollis of Heigham
That is helpful and I understand the issues associated with it, but can the Minister give us some guidance on the timescale? This is a problem now, as my noble friend said. Women, in particular, are low-income savers and have small pots which they are losing. They are being stolen from them with nobody being a thief but with women certainly being the victims. Given that this Bill is still going through this House and will then go on to the other place, presumably once it has finished the Welfare Reform Bill, the noble Lord has until June or July or some time like that before the Pensions Bill completes its passage through both Houses. Can he come up with some proposal by the summer in which we can corral these small pots so that they are not lost permanently to those who can least afford to lose them?
Lord Freud
My Lords, I am pleased to respond to the noble Baroness, Lady Hollis. She will see by the amount of work that we are undertaking and its complexity that getting a comprehensive review is not going to be possible in a matter of months. We are clearly talking about a matter of years to lock this situation down. I refer back in politest possible way to what the noble Lord, Lord McKenzie, said. This has been a problem for a very long time and it is very complicated, involving a lot of different systems and structures of pension provision. We need a holistic solution. We have the work in train. We will get there but it will not be a matter of months, I regret.
Baroness Hollis of Heigham
My Lords, it would be very simple, at least as an interim stage, to build on what the noble Lord, Lord Boswell, was talking about and either have a cap on the size of individual funds that can be taken as cash or to raise the trivial commutation limit under specified circumstances. That would be very simple and would not get in the way of further more fundamental and wide-reaching reforms, of which I understand some of the bigger complexities—particularly between DB and DC schemes, although obviously DB tends to be confined to the public sector. But the noble Lord could make some interim arrangements which would not preclude an intelligent, sensible and decent wider response in the future. At the moment real people are losing real money who can ill afford to do so.
Lord Freud
My Lords, I accept the point that the noble Baroness makes that people lose money because of this. They have been losing money for many years. This problem has not suddenly emerged. Regrettably, because of the amount of work now under way, it would be premature for me to give any time indication about whether one could envisage some certain quick fixes that would go along with an overall strategy. It just depends. Noble Lords will understand that I am simply not in a position to say that we could apply some quick fixes along way. They may be possible but I certainly cannot indicate that that will be the case or the timing of it. I would love to be able to announce a wonderful transformation so that with one bound we broke free. But I can assure noble Lords that there is a major process in train to get a holistic solution to the issues of savings and these pots, and we are moving at a rapid speed to get that done.
Lord Boswell of Aynho
My Lords, I never mind saying this, but the Minister has given us an almost entirely satisfactory response. I can understand the noble Baroness’s desire to get on with this, so perhaps I might counsel the Minister to look at two interim approaches in parallel. First, if he could do anything along the lines of my amendment, it would help. Secondly, we should try to avoid these schemes accumulating further. If he can stop the rot and prevent any more of these little pots being created from now on or fairly soon, it would be very helpful. However, I fully understand, not least because of the comments made by my noble friend Lord Flight, that these are complicated matters. I suspect that we will have only one go at this—it probably will not be in the Pensions Bill with which we are now dealing—and we need to get it right. All power to the Minister’s arm on the overall concept, but I hope that he will remember at the same time to look either at whether existing arrangements and payments can be smoothed or at stopping the rot by preventing any additional schemes being created. However, in the spirit of what has been a very constructive debate, I beg leave to withdraw my sub-amendment.
Lord McKenzie of Luton
My Lords, perhaps I may comment briefly. I can see the thrust of my noble friend’s amendment. I remember that, when we debated the cap, we debated whether there should be an additional lifetime element as well. I think that, at one stage, we debated whether there could be a two or three-year period when one carried forward the unused amount. My recollection is that, other than the annual cap, which is as it now is, all that fell by the wayside, but the Minister may be able to update us on it.
It seems a good idea to me to be able to use the headroom in respect of unused bits, although I do not think there is anything that precludes someone who is, or might become, a member of NEST making a voluntary contribution up to the limit. The limit is not, as I understand it, an employee and an employer limit; there is a limit in respect of contributions for an individual. Certainly, for the reasons that my noble friend advances, if there were opportunities to use some headroom to get more into NEST, that would be good, so far as the removal of the cap supports the thrust of that. Again, given the consensus that was there and the existence of the cap, everything that has the potential to disturb that in the interim makes life a bit more difficult, although it would be good if it could go at the earliest opportunity.
Lord Freud
My Lords, I thank the noble Baroness and my noble friends for bringing the important issue of the NEST contribution limit to the attention of the Committee. I shall deal with the amendments in the order they were raised. The noble Baroness, Lady Hollis, has raised, through Amendment 36, a vital point about the ability of NEST members to make contributions to their retirement pots that exceed the minimum contributions required by automatic enrolment. NEST has been designed to provide a low-cost, portable pension scheme for low to moderate earners. We want to encourage people, where possible, to save more than the minimum. The NEST order and rules already allow a member to make contributions up to the annual contribution limit in the financial year in which the contributions are made, as the noble Lord, Lord McKenzie, pointed out.
The current limit is already set at such a level that it enables median earners to contribute as much as twice the minimum contribution requirement in a tax year. Allowing NEST members to make use of unused annual contribution limits in subsequent years would undermine the purpose of the annual contribution limit. This limit was designed to ensure that NEST does not adversely impact on existing good-quality pension provision. While I understand the principle behind this amendment, we should not forget the purpose of NEST. This is to enable millions of people to participate in pension saving from which they are currently excluded because they do not have access to suitable workplace pension provision. Filling this supply gap requires NEST to be both low-cost and as straightforward a scheme as possible. Adding to the complexity of administering NEST through complex arrangements for calculating the maximum annual contribution would undermine those aims.
Moving on to Amendment 37, the noble Baroness raises another important point, about how the annual contribution limit should be calculated. The limit, alongside the transfer restrictions, is designed to focus NEST on its target market of low to moderate earners. This is to ensure that NEST will complement existing good-quality pension provision, not replace it.
The baseline contribution limit was set at £3,600 in 2005 terms, following wide consultation on the proposals in the White Paper, Personal Accounts: A New Way to Save. Responses on the appropriate level for an annual contribution limit were based on analysis of several factors, in particular, the potential impact on existing schemes and the ability of individuals to save flexibly for their retirement. In line with the provisions in the scheme order, NEST Corporation has adjusted the contribution limit for 2011-12, prior to scheme launch, to £4,200. The current method of setting the annual contribution limit strikes the right balance. It ensures that NEST focuses on its target market of those excluded from pension savings as a result of market failure, while providing for a level of contributions that is sufficient to allow employers and individuals to contribute more than the minimum required.
I turn to Amendment 38, tabled by my noble friends Lord Stoneham and Lord German. This puts forward the recommendation from the Making Automatic Enrolment Work review that the Government legislate now to remove NEST’s annual contribution limit from 2017. That review recognised the importance of the NEST contribution limit during the introduction of the reforms. It acknowledged that there was broad consensus behind the reforms, and that NEST’s role was to fill the supply gap that those in the existing industry currently find difficult to serve. The review saw the contribution cap as a key lever in ensuring two things: that NEST remains focused on this target market as the reforms are staged; and that during this important period it does not adversely impact existing good-quality pension provision. However, the review team considered that once the reforms were fully implemented it may be appropriate to remove the cap. This is both to ease the administrative burden on NEST and to avoid any unintended message that there was somehow a maximum appropriate level of pension saving.
Great minds think alike. Section 74 of the Pensions Act 2008 already requires the Secretary of State to appoint a person to review the effect of the annual contribution limit in 2017. By this time, the reforms will have been fully implemented and we will have more evidence on the effect of the reforms as a whole, including the impact of NEST on the marketplace. I am not saying that the review team was wrong. I am saying that, given that it saw 2017 as the right time to remove the cap—by then we will have much more evidence of the impact of NEST in the real world—2017 is also a more sensible time to consider changing or removing the NEST annual contribution limit. Since this can be achieved by secondary legislation, there is no need to legislate now. I understand the principles behind these amendments. However, now is not the time and, given the scope individuals already have to make additional contributions and our intention to review the contribution limit in 2017, I urge the noble Baroness to withdraw this amendment.
Baroness Hollis of Heigham
I can well understand why pension providers are—let me put it politely—apprehensive about the competition offered by NEST in terms of fees and charges and, therefore, want to protect the funds under their management. I accept the noble Lord’s argument that the bigger issue of getting rid of the cap altogether may have to wait until 2017, although I am disappointed about that. What I do not understand is why there should be any threat to existing alternative providers for people who are in NEST and who, two or three years down the line, find that they have missing contributions, possibly by virtue of maternity leave or whatever. I cannot see how that situation—making good the shortfalls of previous years—is in any sense a threat to any other provider. Because they are in NEST, they will not be in any other provider’s scheme. NEST is not, therefore, in any sense, competition to them.
I support the second of these amendments, although I understand the challenge that it might represent. However, the first amendment would simply make good the headspace in back payments, and I do not see why that would represent a challenge or a problem of any sort. Given that people occasionally get modest sums of money, it would seem to be consistent with our wish to encourage people to think about their retirement and to be able to make that money available for NEST. I do not know whether the Minister has anything further to add; he may feel that he has said all he is going to say on this.
Lord Freud
I thank the noble Baroness for giving way and for giving me the opportunity to clarify matters. This is simply about administration, simplicity and cost. As you start to introduce these kinds of rules going backwards and forwards on what people can contribute, it gets very complicated and you start to build in the kind of complexity that we are all complaining about. Stranded pots are just one area generated by the complexity in the system. Therefore, the rationale here is: keep it simple.
Baroness Hollis of Heigham
My Lords, given the time, I do not think that there is any point in my pursuing this matter further. However, if not during the course of this Bill, perhaps subsequently we will come back to this bundle of issues, because it clearly has to be addressed. I beg leave to withdraw the amendment.
Lord Freud
My Lords, my noble friend Lord German has tabled an amendment to give the Secretary of State powers to make regulations to issue guidance on the level of charges made by defined contribution pension schemes to deferred members. These deferred member charges, as he called them, are called “active member discounts” by the industry. Effectively, they offer lower charges to active members as an incentive, and perhaps a reward, for continuing loyalty.
The DWP has done some robust research on defined contribution schemes sold in the 2008-09 financial year. That showed that—somewhat to our surprise—charges typically do not exceed 1 per cent across the market, including trust-based and contract-based schemes. Where different rates were applied to active and deferred members, this tended to be in the form of even lower rates for active members, which begins to suggest that a true discount is emerging for active members, rather than a penalty for deferred members. It may be that consumer groups are saying that, as the pressure on charging comes down, the gains are taken by active members rather than deferred members. That might be one way in which we would like to look at it.
Baroness Drake
Even though the evidence that the Minister refers to shows that he is referring to 1 per cent, on a base load contribution of 8 per cent we aspire to charges of the order of 0.3 per cent and 0.4 per cent. A charge of 1 per cent is not a statement of success. We are trying to deal with two things. The inactive or non-contributing member should not suffer a disproportionate penalty, which they would not suffer in NEST. Equally, at the same time, charges should be brought down overall. I would not be very content if we were willing to settle on something of the order of 1 per cent. One would hope that, with mass auto-enrolment, the market generally would move to 0.3 per cent. If not, perhaps the provider should not be in the market providing products.
Lord Freud
I thank the noble Baroness, Lady Drake, for her market insight here. I choose my words carefully. It is clear that the capping has had an effect on charges. We are concerned that the pressure on charges should be maintained. That is why we have committed to monitoring levels of charging in the marketplace as automatic enrolment is introduced. We will publish guidance on default investment options in automatic enrolment schemes later in the spring. This sets out guidance for suitable charging structures. The guidance encourages appropriate charges, which match members’ interests, and protects individuals from charges that are excessive in relation to the product they are paying for.
Let us not forget, as the noble Baroness has just pointed out, that we are introducing a major change to the pensions landscape. NEST is being set up to offer low-cost pension provision to individuals on low to moderate earnings. We expect this, as does the noble Baroness, to act as a benchmark across the pensions industry, as well as to help millions of low to moderate earners to save. We are also looking seriously at how transfers can be facilitated across the industry so that savers can shop around for better charge rates more easily. As I described in my response to a previous amendment, HMT recently held a call for evidence on early access, including a specific question on ways to improve the transfer process. The DWP, as I have already described, has recently published a call for evidence on the regulatory differences between occupational and workplace personal pension schemes. In this, we are seeking solutions to address existing rules that could impact on the success of the reforms. Those include rules on early scheme-leavers and disclosure.
We are actively seeking to identify ways to facilitate the best possible deal for savers across the areas of charging and transfers. Therefore, I do not believe that regulations to make guidance are necessary at this time. I urge the noble Lord to withdraw the amendment.
Lord German
I am grateful for the statement that the Minister has just made. Apart from the actions that he has described, I should be interested to know how in future you can actively promote to the companies and individuals concerned the sort of changes that the Government wish to see. I do not suggest that the DWP should set up its own confused.com-type of operation, but it may well be that we need some form of open process by which both employers and employees can see the benefits of different levels of charging by the different companies and whether there is transparency in the operation. I welcome the Minister’s statement on that and beg leave to withdraw the amendment.
Lord McKenzie of Luton
My Lords, in relation to Amendment 40, from the earlier response that we got from the Minister in relation to small pots and all the activity that is going on there, I presume that the sort of protection that the noble Lord, Lord Stoneham, is looking for will be encompassed within that whole exercise. Accordingly, I should be interested to see the outcome of that in due course. Unless I am misunderstanding this, that is where it would be dealt with.
Lord Freud
My Lords, I thank my noble friend Lord Stoneham for these two amendments, which concern the same issue—that of protection. Amendment 40 seeks to give us the powers to make arrangements to support short-term workers to build their pension savings. It is particularly those individuals who will receive a refund when they leave an occupational scheme within two years who will lose that opportunity. Clearly, the refund can be a default action, although they can choose to transfer the whole pension pot to another scheme if that is appropriate. Clearly, there is a very legitimate concern here that the default refund may mean that some individuals do not build up any kind of decent pot over time.
These are the areas that we are considering through the call for evidence on regulatory differences between different types of pension schemes, so I confirm to the noble Lord, Lord McKenzie, that our activity here addresses this issue. It is a very complex area and there are many considerations on both sides that we need to take into account before making a decision or changing legislation. The issues are the trade-offs between helping employers and schemes and increasing pension savings. We cannot, for example, limit short-service refunds without considering appropriate processes to help occupational schemes to manage additional small pension pots. Therefore, everything connects to everything else. As I have already described, we issued a call for evidence on 31 January to initiate a debate on possible solutions. The response will come this summer.
Amendment 41 would ensure that employers take into account pension charges when calculating their employer contributions. I assure noble Lords that we are not complacent on this issue. We fully appreciate the impact that charges can have on an individual’s pension pot, particularly given the beta returns that we are currently seeing. We are taking steps to ensure that such charges do not have a disproportionate impact on members’ savings. We will publish guidance on default investment options on automatic enrolment schemes later in the spring. That will cover suitable charging structures, as I said. The guidance will encourage appropriate charges which, first, match members’ interests, and, secondly, protect individuals from charges that are excessive in relation to the product that they are paying for.
Baroness Drake
I am conscious of the time and do not want to hold anybody up, so I shall try to be brief. I understand the issues that the Minister is trying to address, but I repeat that low levels of charges—for example, 0.5 per cent or below—are fundamental to the success of this asymmetric paternalist product. Somehow accommodating business models for suppliers whose charges hover around 1 per cent will not deliver the necessary strategic outcomes.
Lord Freud
I reassure the noble Baroness, Lady Drake, that if the research shows that charging levels are creeping up, we have the power under the Pensions Act 2008 to regulate to set a charge cap for qualifying schemes and auto-enrolment schemes. NEST will offer low-cost provision to individuals on low to moderate earnings. As the noble Baroness knows better than anyone else in the world, the annual management charge will be 0.3 per cent. If the contribution charge is taken into account, the overall annual charge is the equivalent of about 0.5 per cent. That will provide a clear benchmark for pension providers.
Given the safeguards that will be in place, and in light of the assurances that I have been able to give on Amendment 40, I urge my noble friends Lord Stoneham and Lord German not to press their amendments.
Jobseeker’s Allowance (Work Experience) (Amendment) Regulations 2011
Lord Freud Excerpts(13 years, 2 months ago)
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Lord Freud
That the Grand Committee do report to the House that is has considered the draft Jobseeker’s Allowance (Work Experience) (Amendment) Regulations 2011.
Relevant document: 15th Report from the Joint Committee on Statutory Instruments.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, in moving the Motion, I am satisfied that the instrument is compatible with convention rights.
I am grateful for the opportunity to debate the amendment before the Committee today. As your Lordships know, young people typically face disproportionate difficulties in finding work both during and after periods of recession. However, youth unemployment was stubbornly high even before the recent recession. The Government inherited a major youth unemployment problem, which has left us with some 600,000 young people who have never worked since leaving school or college and some 250,000 children growing up in homes where no one has ever worked. This is why this Government are determined to overhaul the welfare system and support more young people on to the first steps of the career ladder.
Today’s amendment is an important part of that process. It is just one element in a package of measures that the Government are introducing to help young people to make a smooth transition from education into work. However, it will play a key role in ensuring that we offer young people the opportunity to gain real experience of the world of work and the discipline required to allow them to play a full and responsible part in society.
The rationale underpinning the proposed amendment is really quite straightforward. We wish to reframe the rules around work experience programmes to make them more effective and more valuable for those who need most support. That is why we have built a number of defining characteristics into the new programme, which I will run through briefly.
For example, we aim to target the programme primarily at 18 to 21 year-olds who find it hardest to make the transition into employment. This is important, because the evidence suggests that, even though the headline figures for youth unemployment move up or down in a relatively smooth manner, there is a great deal of volatility underlying the figures. Indeed, some 80 per cent of young people move off jobseeker’s allowance after six months. Rather than paying for people who would move off JSA without the need for a great deal of support, we want to make sure that we target our resources at those who need it most—the 5 per cent or so who are at most risk of becoming long-term unemployed or withdrawing from the labour market altogether.
Another feature of the work experience programme is that we are keen to ensure that those taking part get a real sense of what it is to make the commitment to work. This is why we have made a conscious choice to extend the work experience placements from two weeks all the way up to eight weeks. Just as important, this approach also explains why we have introduced an element of mandation into the scheme. What this means in practice is that a Jobcentre Plus adviser will offer advice to those who are most likely to benefit from a spell of work experience. After that, the jobseeker will have a choice about whether they commit, so that funds are focused on those willing and motivated to attend. Each participant will then have a week-long probation period to find out whether the work is suitable for them. From this point, however, there will be a benefit sanction for those who do not complete their placement. This will give each young person a real sense of what the world of work is about—discipline, professionalism and commitment. Not only that, it also signals to the host business that we value the time and effort that it is putting in, as we will not accept time-wasters getting away scot free.
The last point that I wish to raise in relation to the work experience scheme is that we will still ask those taking part to show that they have made an effort to find work. This is a particularly important point because we know from previous experience that, even when people are doing programmes such as this, they have a better chance of moving off JSA if they stay with their job searches. However, we will also make sure that advisers have the flexibility to adjust the job-search reviews to make sure that they do not disrupt the work experience placements.
We are taking a whole new approach to work experience to make it more relevant and more cost-effective. We have created the framework for giving young people the opportunity to boost their confidence, their employability and their prospects. We have already secured support for the programme from a number of major companies, such as Skanska, Homebase, Hilton Hotels, McDonald’s, ISS facilities management, Chums, De Vere hotels, Carillion, Coyle Personnel and Punch Taverns.
This is a great start in giving young people access to quality work experience and introducing them to the world of work. However, given the sheer scale of the challenge that we have inherited, we know that we have far more to do to effectively tackle youth unemployment. The Government are willing to take on the challenge. That is why we are helping more young people with personalised support at jobcentres to help their transition to work, making access to skills provision a priority across the country and vastly increasing our investment in apprenticeships, where the Government have already committed to increase the budget for 2011-12 to more than £1.4 billion.
We will also help to get Britain working by rolling out work and enterprise clubs across the country, introducing the new enterprise allowance to support the start-up of up to 40,000 new businesses over the next two years and introducing the new work programme this summer to provide tailored solutions on a payment-by-results basis to help those trapped on benefits to start making the journey back to work.
All these measures are part of a wider commitment across government to make sure that we are giving everyone, especially young people, the right support to make the transition into the workplace, no matter which path they choose to get there. This is the only way to help people to work their way out of poverty and to spur the private sector growth that this country needs to drive the recovery and generate the long-term jobs that we need to build a sustainable economy for the future. I beg to move.
Lord Knight of Weymouth
My Lords, I am grateful to the Minister for putting flesh on the bones of this statutory instrument. Inevitably, what can be put across is limited by the regulations’ dry form. My reading of them is that they change the jobseeker’s legislation so that you can volunteer to take up a work experience opportunity and then, once you are in, it becomes mandatory with the threat of sanctions. If I was mischievous, I would say that this raises the possibility of compulsory volunteering. I know that it is not quite that. I have had experience of debating with Prime Ministers and others whether or not compulsory volunteering is a credible option, so I will not stray down that road.
We agree with the Minister about the value of work experience. When I was appointed Employment Minister in the previous Government, the Prime Minister told me that, as employment was rising in general and in particular among young people, the challenge was to get it to come down again. He would lend a hand through chairing the National Economic Council. It was implicit that it would be particularly helpful if that were achieved by the spring of last year rather than the summer. We did a range of things: the young person’s guarantee, the six-month offer, the September guarantee of education for young people and expansion of apprenticeships and, crucially, Backing Young Britain, which was in some ways the best example of which I can think of what others might describe as the big society.
It was a considerable effort to persuade employers in this country to offer young people opportunities for work—as work experience, as internships, as apprenticeships, or as whatever else they could offer to give young people a chance and something to put on their CV. We also developed sector routeways. When the Minister listed the names and different sorts of employers who have already expressed an interest in his work experience scheme, it was interesting to note that quite a few of them were in hospitality. I wonder what has happened to those sector routeways in care and in hospitality in particular and the part that they played in creating tens of thousands of opportunities for real work for our young people. We also had the fiscal stimulus, as a result of which we started to see growth come back into the economy and, magically as instructed, unemployment, particularly youth unemployment, fall in the spring. It is unfortunate that it is now going back up.
Work experience was vital to that effort and to all those packages for which I was responsible last year and the latter half of the year before. Therefore, I cannot argue with the Government in their wish to bring forward a work experience scheme. I would also encourage them to develop a form of work experience along the lines of what we would describe as internships. They are not a silver bullet—as, if I were unkind, I would say Ashley Cole might have found out at Chelsea recently—but they can be extremely helpful. In my private office in DWP, for example, we took on an intern who turned out to be an excellent official and who has been taken on permanently by the department. I would be interested to learn whether the Minister is now taking on another intern given that he knows the value of internships in the past.
We have seen the success of more extended schemes such as the Future Jobs Fund, which provided six months’ real work, at proper minimum rates of pay, through work experience, volunteering and the Community Task Force. I commend to your Lordships the work that we did with BTCV, CSV, v and Volunteering England, which provided 50,000 young people with work experience opportunities in the voluntary sector. I would be interested to learn whether any voluntary sector organisations—the Minister did not list any—will be engaged in offering work experience programmes. The outcomes from that scheme—I spoke to the chief executive of BTCV yesterday—were exceptional given the quite limited time during which the work experience opportunities were available.
The principle behind the proposals is therefore fine, although I have a few questions for the Minister in addition to those that I have already asked—he knows that I like to ask a few questions. Why the mandation? When we introduced our work experience schemes, which proved successful, as I have said, we did not need to change regulations in this way to require mandation. Might not a potential unintended consequence be that people will say, “Well, I’ve still got to fulfil the jobseeker regime in terms of being available for work and actively seeking work, which I’ve got to demonstrate to the adviser at Jobcentre Plus, so why put at threat my benefit by signing up to a scheme where, as a sanction, I could lose it? Why not just go and volunteer, and build up a CV by volunteering and doing work experience in other forms rather than joining the Minister’s scheme, where I do not get any extra money but where I might lose it?”
The Minister said that this was part of a wider package for young people. Of course, whatever the Government feel they can do to help young people is welcome, because we are extremely concerned about the rising numbers of young people who are unemployed, particularly the huge number of graduates who are now in unemployment. Are there any guarantees attached to his package? We had a guarantee that you would get some useful activity at least, even if it meant the Community Task Force as the back-stop provision, if you like. That meant that we could require them to do something and that doing nothing was not an option. Is doing nothing an option under the Minister’s scheme? How will he procure this provision? Will it be in the normal way, or will he just encourage people to offer work experience opportunities but not actually procure work experience opportunities, as I recall we did by, for example, using Reed in Partnership?
In summary, there is nothing that I can oppose in considering this statutory instrument in Committee today, but I still need a bit of convincing that it is needed. I would be grateful for answers to my questions, particularly as to whether there will be unintended consequences, with people not wanting to engage because of the threat of sanctions.
Baroness Thomas of Winchester
My Lords, I shall add one or two comments. I, too, very much welcome these regulations. I was interested that the Minister said that they were aimed primarily at 18 to 21 year-olds. That presumably means that the Jobcentre Plus advisers have some discretion and that the only thing that is absolutely laid down is that the person must be over 18. Will that be known by all the Jobcentre Plus advisers so that they do not prevent anyone from getting a work experience placement if they are, say, 25? Someone may have had a very chequered career and may have been in and out of work; they might quite like to be involved in this scheme but may be over 21. Can the Minister clarify that? Furthermore, why did the Minister alight on the time span of two months? I would rather like one of these work experience people myself, but I suppose that the House of Lords is not an employer. It is a pity—maybe we should be.
Lord Freud
My Lords, we have had an interesting debate and, as usual, some snappy questions. One of the things that this short debate has clearly demonstrated is the concern that we all share for the plight of young unemployed people. Their plight is why it is so important to develop this scheme and other schemes like it. I shall try to work through some of the questions.
I start by making the point that we have effectively built something of a Catch-22 for young people in that employers require work experience, or are much more comfortable with people who have demonstrated an ability to hold down some good work experience, whereas the support system for poorer youngsters on JSA has been loath to let them do it. The previous Administration carried out some experiments and programmes on this, as the noble Lord, Lord Knight, pointed out, and I fully and absolutely acknowledge that we are building on previous experience. The noble Lord referred to the contract with Reed. I was interested to read the report on the Reed work experience and some of the interesting lessons there. One of the most interesting lessons was that the switch from going off JSA, which was a kind of bureaucratic requirement, on to a training allowance led to the loss of many youngsters, some simply because they could not transfer smoothly. The other factor that made that programme improvable—I will express it like that in the interest of consensus—is that the youngsters lost the link with jobseeking in that period. It was called a training allowance but they did not feel that they were still linked in. They lost the link with their Jobcentre Plus adviser.
This is a very different approach, which we incorporate within the mainstream JSA offer. The question “Why mandation?” was asked. I think that this is one of the things that starts to pull it together. We are saying to people, “You remain on the conditionality that JSA requires—you have to go on job searching. We will be more flexible about how you do that, working with the employers, but mandation remains in your JSA requirement and that carries forward into your work experience. Also”—as the noble Lord, Lord German, pointed out—“we have balanced it so that you have a week to work out whether this is really completely intolerable, and you can get out without a sanction. But once you have committed, you are like any other employee and you cannot bunk off without some repercussions”. In that way, the JCP regime is replicating what an ordinary employer would do to an ordinary employee where there is a set of mutual obligations. We cannot have a situation where employers, for whom we will want to make a lot of effort to ensure that this work experience is of great value, feel that they waste those resources because somebody can just stop turning up. That is the reasoning behind that.
Pensions Bill [HL]
Lord Freud Excerpts(13 years, 2 months ago)
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Lord Freud
That it be an instruction to the Grand Committee to which the Pensions Bill [HL] has been committed that they consider the bill in the following order:
Clause 1, Schedule 1, Clause 2, Schedule 2, Clause 3, Schedule 3, Clauses 4 to 17, Schedule 4, Clauses 18 to 24, Schedule 5, Clauses 25 to 29.
Pensions Bill [HL]
Lord Freud Excerpts(13 years, 2 months ago)
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The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, the purpose of the amendments moved by the noble Lord, Lord McKenzie, is to delay any change to the age of 66 until women’s state pension age is increased to 65 on the current schedule. The amendments moved by my noble friend Lord Boswell aim for, if I may use the expression, a third way, by proposing a timetable that increases the state pension age to 66—one year later than the Government propose, but one year earlier than proposed by the noble Lord.
I begin, however, by welcoming the fact that, in each case, the amendments propose to bring forward the increase to 66, in the first case by four years and in the second case by five. This reflects widespread recognition that the current timetable for raising the state pension age to 66, which was approved by this House and in another place less than four years ago, has already been overtaken by events. I will not, therefore, detain proceedings by repeating the case for a faster rise in the state pension age, which I am pleased to note that my noble friend supports. I will just go to the point made by the noble Lord about the coalition agreement, and I say upfront that my honourable friend the Minister for Pensions has said in another place that women’s state pension age does not start rising to 66 until 2020.
I will endeavour to explain why, notwithstanding the impact which we recognise our proposals will have on a small minority of women, we believe that we should not delay until 2020 before we start on the path to 66. We estimate that our proposals will save £30 billion, in constant price terms, in state pensions expenditure, after taking account of all of the increased spending on working-age benefits—a point which the noble Baroness, Lady Hollis, was concerned about. The difference between what we have proposed and what is proposed under the amendment of the noble Lord, Lord McKenzie, is about £10 billion, which is a very significant sum. It is equivalent to one-third of the total savings to the public purse from our proposals. In proposing to forego this £10 billion, the noble Lord is perhaps losing sight of what such a sum represents. To help put this in context, in order to save even half of that today, which is broadly the annual savings from raising the state pension age by a year, we would, for example, have to cut the education budget by 10 per cent over the spending review savings. The estimated benefits from additional tax and national insurance receipts would also be cut by nearly a third, from £8.1 billion to £5.6 billion. The alternative proposition put forward by my noble friend would also significantly reduce the savings from our proposals, in this case by more than £7 billion.
The question is: who picks up the tab if we delay until 2022 or 2021? I suggest that the answer is: our children and our grandchildren. The point has been made that our proposals will make no contribution to reducing the budget deficit in this Parliament. This line of argument implies that, once the immediate fiscal crisis is out of the way, we can afford to relax. Although we expect public debt to be on a declining path by 2015-16, it will still be well above the pre-crisis levels. The OBR forecasts that public debt will be 67 per cent of GDP in that year, compared to less than 40 per cent five years ago. We need to do all that we can to keep debt down, and hold it down over the medium term, to ensure that we have the capacity to respond to future fiscal shocks. The cost of increasing longevity will not, unfortunately, stop increasing in 2015.
I turn to the impact on women, which is at the core of these amendments. The argument is that the adjustment we propose is unfair to women in their late 50s. I do not dispute the fact that a gender gap still exists in pension provision—a point made by several noble Lords. However, the proposals of the noble Lord, Lord McKenzie, do not suggest that we should delay increasing the state pension age to 66 until the gap is closed. Nor do I dispute that, because of our proposals, some women will need to work for longer than they may have otherwise planned to. I am prepared to say that I do not think that that is a bad thing. We need people to work longer because they are living longer. We need them to contribute more and, by working longer, they can save more for their retirement. Working longer has not just financial benefits for the individual; people of working age are generally healthier when they are employed than when they are not. Some of these women will indeed increase their pension saving as a result. Only a small proportion, some 4 per cent, of women currently aged between 55 and 57 say they are already retired; while around 70 per cent are still in employment.
Let me deal with two of the issues raised by noble Lords. On the point raised by the noble Baroness, Lady Hollis, on the cliff edge for men as well, I do not see a cliff edge in our proposals. The whole point is that there is a gradual increase. Anyone, man or woman, who is on pension credit, must already be above women’s state pension age, and by definition they will not lose out or have to move off pension credit as the state pension age increases.
Baroness Hollis of Heigham
That means that a man who is currently on pension credit, who qualifies for it shortly after his 60th birthday, will hold on to that for the next five years, while women’s pension age increases. Therefore, a woman of a similar age could have half his income.
Lord Freud
The point is that once you are on the system there is a gradual move up, so you do not bounce on and off it. You are on that system. Clearly, we are looking at two systems—a pensions system and a working-age support system. Nothing changes while we have that gradual increase for the individuals concerned. People will join the system at different points, depending on their age. Fundamentally, there is no difference between the Government’s position on either of the amendments.
Let me deal with the point raised by the noble Lord, Lord McKenzie, on buying back class 3 voluntary national insurance contributions. There has been a lot of debate about this matter during proceedings on various Bills, as he will be more aware than me. I believe that it took two Bills to allow people, mainly women, to buy additional years, going back to 1975. However, the noble Lord will also recall that this particular easement applied only to people who reached state pension age before 2015. People must weigh up their options when deciding to buy additional national insurance contributions, and we do not have any plans at this moment to provide refunds.
Let me turn to the facts about women’s life expectancy. Women will on average still draw their state pension for longer than men after the pension ages are equal—a fact that was rather put to one side during our debate before the Recess. It is important to record that, at the time that the decisions were made about when to raise the pension age to 66, a woman born in 1954 would be expecting to draw her state pension at 64 for an average of 24 years. Thanks to increasing life expectancy she will still on average draw her state pension for 24 years, even with the rise to 66 proposed in the Bill.
Baroness Hollis of Heigham
I should like to push the noble Lord again about the timescale. I think that there has been unanimity, pretty much, that the state pension age for women and men should be equalised. The debate has been about the increased speed of it and, therefore, the degree to which women can reasonably have been expected to make provision for it, and to take into account whether they are in waged or unwaged work. As we know, many women will be in heavy but unwaged work at that point in their lives.
Is the noble Lord aware of a similar instance some time back? In the 1982 social security legislation—I am not sure whether it was introduced by the noble Lord, Lord Fowler, but it might have been—the Government proposed, with some intellectual justification, to remove the right of widows to claim 100 per cent of SERPs entitlement, rather than the conventional 50 per cent as per the status of a widow. That was due to come into effect 20 years on, in 2002. The Government were going to give 20 years’ notice, except that they did not. They forgot about it entirely. Suddenly, in about 1997 or 1998, that issue landed four square on my desk. It was clear that women did not have sufficient notice and that three or even five years’ notice, as it would have been in 1997 for 2002, was regarded by the noble Lord’s party as unacceptable, even though it had been an omission of publicity.
We all agreed that five years’ notice of something which would happen only to a group who could not foresee their future, because it was about widowhood, and that they would inherit only 50 per cent rather than 100 per cent of SERPs as a result, was far too truncated and should be extended. Therefore, we brought back to your Lordships’ House, with all-party agreement, provision that that change should start from 2010 and that for each two years a 10 per cent SERPs reduction should take place. So, if you became a widow in 2012, you would get 90 per cent; in 2014, I think I am right in saying, you would get 80 per cent; and so on. Finally, you would get to 50 per cent by 2020.
In other words, we gave a further 15 years’ notice over and beyond what the Government of the day had originally intended because they had failed to publicise it. We were told that this was unfair and unreasonable, and might even be subject to judicial review, because people were not aware of what was going to happen. Five years’ notice at the point at which we could have escalated the publicity would not have been deemed to have been enough. Will the noble Lord care to comment on this story?
Lord Freud
My Lords, I thank the noble Baroness, Lady Hollis, for that. I have to confess that I was not aware of those events in 1982. I was aware of some events—I think that I was writing a Lex column in 1982 so I was not completely out of the picture. The noble Baroness makes the point that there were five years of notice. Clearly, the smallest amount of notice that we have in this instance is 6.5 years for those who are affected at the tightest level. We believe that that period, which admittedly is shorter than other periods that we have seen, will still allow women to plan for their retirement.
Lord McKenzie of Luton
My Lords, I thank every noble Lord who has spoken in what has been a well informed debate. When I hear my noble friends in full flight, it almost makes me glad that I am not the Minister any more. Pretty much everyone who spoke, apart from the Minister, recognised the unfairness embedded in these proposals and was supportive of one way or another—either a timetable or mitigation factors—to address that unfairness. The Minister focused principally on the differential costs between our proposals in this amendment, the Government’s position and the proposals made by the noble Lord, Lord Boswell. Of course there is a cost, but judgments have to be made, and the Government will have made a judgment on this. Why did they not do things even faster than they proposed, which would have saved even more money? Presumably the answer is that they made a judgment about what they thought was fair and where the balance lay in all this. We are saying that see the balance lying in a somewhat different position. Let us put this in context. We are looking at about £10 billion not as an annual hit, but over a period of years and when we get to 2016-17, GDP will be of the order of £2 trillion a year. Of course, there needs to be fiscal responsibility, but we think that the Government have got the balance wrong in this.
The noble Lord said that he thinks that it is a good thing that one ramification is that women will be working longer, which will make them healthier and potentially better off. The issue is whether people have the time to adjust. Many of the case studies that we have are of people who have already made their dispositions on an assumption about when they can access the state pension. That upheaval is creating problems. I was interested in what the noble Lord said in response to my noble friend about the cliff edge and continuing entitlement to pension credit. That was particularly illuminating and I am grateful for it. I note that we are going to pick up the point made by the noble Lord, Lord Boswell, about the EU aspects of that later; I look forward to that.
Like the noble Lord and my noble friends Lady Turner and Lady Drake, I think that the people who are contacting us about this are not blind to the changes in longevity. People accept that the issue has to be addressed, but we come back to the speed and manner with which it is being done. That is the bone of contention. That is why we will continue to press the matter.
A number of the points raised in the debate—the pension credit point in particular—will feature in subsequent amendments, so I shall not go into detail on them. The noble Lord, Lord German, made a point that my noble friend Lady Hollis picked up on when he said that part of the mitigation would be to have a decent state pension of £140 a week. That would be good if it were achievable, but it is down the track on any basis. How far down the track, we may elicit a bit further during the course of our proceedings; or perhaps not. However, it does not mitigate what is happening to women now and over the next few years, with people not being able to access the state pension that they thought they were going to get, and which it had been legislated that they would get.
We are bound to return to this issue on Report. On one basis or another, I hope that we can find common cause, whether the middle route preferred by the noble Baroness, Lady Murphy, or our proposal. I hope that we can stick with this consensus and get some real change, because it will make a real difference. I beg leave to withdraw the amendment.
Lord Flight
I echo the comments of the noble Baroness. One of our failings as a people is that, because people are decent, we try to provide for everything and clutter it up to the extent that the system becomes difficult and expensive to operate. I was interested to note, in seeking to check my state pension entitlements, that the office that you approach got them wrong; we had a pleasant correspondence. I hate to think, even as we stand, that in people’s combination of straightforward state pension, SERPS and whatever else they may have, the records are all over the place. We may sit here and think that it is lovely, but actually it is a shambles.
I can well imagine that, if you start adding all sorts of groups and special things out of decency, you will get, as the noble Baroness described, a huge increase in bureaucracy. It strikes me that pensions is one area that has suffered in this country from too much complexity. My view is that the issues raised need addressing, but that they will have to be addressed in a separate box through welfare arrangements.
Finally, I still take the view that when the arrangements came in after the war, the age of 65 then was something like 78 today in terms of equivalent fitness and health. I desperately want to see a decent state pension for everyone at the age of 70 that will lift them right away from dependency, pension credits and everything else. I should like to see things tidied up, slimmed down and done as cheaply as possible to achieve that as soon as possible. It strikes me that for the overwhelming majority, that is the need. Although there are cases of people who have done heavy work with physical demands and whose bodies have worn out, the great majority of people will be pretty fit until they are 70.
Lord Freud
I thank the noble Baroness, Lady Turner, for tabling this amendment and for giving us the opportunity to debate a key concern about increasing the state pension age and longevity. I use the soft “g”, whereas I notice that the noble Lord uses the hard “g”. We probably differ on other things as well. The noble Baroness raised the question of what older people want and whether they want to work longer. Research has found that people want to return to work, whether for financial, personal or practical reasons, and will find ways to do so if they are motivated, have recent work experience and if illhealth does not act as a barrier.
In essence, the amendment is about whether it is fair for the state pension age to be the same for everyone irrespective of their circumstances or whether we should have a variable state pension age for certain groups. To echo what my noble friend Lord Flight said, one of our aims—which is in common with previous Governments—is to simplify an extremely complicated pensions system. The Bill contains various measures to simplify, from the abolition of the fiendishly complicated and fascinating PUCODIs, to which we will come shortly, the flexibility to consolidate additional pension—
Lord Freud
There are only two experts in the room on PUCODIs.
On the serious point, simplicity is really important in this system. Clearly, we have tipped over the edge in complexity in the pensions system, as we have in the welfare system. Our state pension system has always been based on a common state pension age—albeit differentiated by gender, at least for the time being. Each exception that we add would increase the complexity. Including health conditions, occupations—and even, as has been suggested, where someone lives if we add that into the mix—would rapidly pile confusion on confusion. Introducing different state pension ages at a time when we are working to simplify benefits and pensions would make the system very complex and difficult to administer, and would take us further away from our objective.
The amendment raises questions about parity of treatment between those who could get their state pension from an earlier date and those who could not. Of course, the kind of illness or infirmity envisaged would need to be defined, as would the types of employment that it suggests be covered. There are, of course, some countries where people are allowed to retire earlier than the standard state pension age from occupations which may be classed as particularly arduous or dangerous employment, but who is to say what is arduous or dangerous? The other point we must note here is that in many of those cases, retiring early results in a person’s state pension being reduced, as might be expected for any pension scheme. Through her amendment, the noble Baroness, Lady Turner, shares our view that having poorer pensioners is not a desirable outcome, but to allow early retirement without reducing benefits could be very expensive.
Noble Lords will share the great sympathy that we all have for people who are in ill health, whether they have the misfortune to become seriously ill or are infirm. We also have sympathy and respect for the carers referred to by the noble Baroness, Lady Hollis— particularly for what she calls the heavy-end carers. I do not have an answer to that, certainly not today, but I will reflect on her comments. As Michael Marmot has shown, there are long-term differences in disability-free life expectancy between socioeconomic groups, and they need to be addressed. Noble Lords will be aware, however, that there have been improvements in both life expectancy and healthy life expectancy across all sectors of our society.
Baroness Hollis of Heigham
Given that the Minister referred to last year’s Marmot report on health, can he confirm that it found a 17-year difference in healthy life expectancy between the richest and the poorest?
Lord Freud
I regret that I do not have that figure to hand, but I can provide it later. I am sure that the noble Baroness has it to hand and that that is the point of her question, but I will confirm the exact figure.
The other point is on life expectancy across the regions. There are differentials, but it is important that life expectancy has risen in all regions and looks set to continue to do so. In England, in the 29 years from 1981 to 2010, it increased from 79 to 86 for men and from 83 to 89 for women. In Scotland, it increased from 78 to 85 for men and from 81 to 87 for women; and in Wales, it increased from 79 to 86 for men—the same as in England—and from 82 to 88 for women. There are differentials, but they are all moving in the same direction at roughly the same pace.
Likewise in terms of occupations, male manual workers have seen an increase of almost two years in their life expectancy at 65 between 1992-96 and 2002-05. Women manual workers have seen a one-year increase in the same period. Reverting to the point that we discussed under the previous group of amendments, there is no doubt that on average we are living longer and healthier lives than in the past. I shall not go through the figures that we discussed then.
When we come to what kind of support we can offer to people as they get toward the end of their working lives, I need to emphasise that we have developed a support network in this country, and we are going to transform it. Many people in this Room will be part of the consideration of the new universal credit. There clearly is support for people of working age with health problems.
With the universal credit, we have the opportunity to sweep away the patchwork of benefits and credits and to bring in a much more coherent and simpler system. That system can take the weight of the concerns of the noble Baroness. That is a better place to address the concerns underlying her amendment. For that reason, I do not accept that varying pension ages is the right way to support people who have ill health towards the end of their working lives, and I therefore urge the noble Baroness to withdraw her amendment.
Lord Freud
I thank the noble Lord, Lord McKenzie, for tabling this amendment and the noble Baroness, Lady Drake, for introducing it. It allows us to consider the role that pension credit plays in providing income-related support for those over a certain age. These amendments seek to keep the pension credit qualifying age at the existing timetable for women’s state pension age by proposing a new and separate age schedule that would apply to pension credit between March 2011 and March 2020. The effect of these amendments would be to break the link between pension credit qualifying age and women’s state pension age.
Lord Freud
Yes, but it is being pulled together for men. That is the point of the 1995 proposition and, now, the acceleration.
The effect of these amendments would be to break the link, as I said. As the schedule proposed by the amendment would effectively follow the existing timetable, it would therefore see a divergence from the increase to women’s state pension age from 2016 as proposed by the Bill. The amendment also seeks to ensure that the pension credit qualifying age cannot be set higher than state pension age in the future.
As life expectancy is increasing for people at all income levels, it is right that we raise the starting point for pension credit in line with changes to women’s state pension age and, beyond that, state pension age. A key part of the Welfare Reform Bill that is currently going through Parliament and of the introduction of universal credit is to ensure that people of working age have the opportunity to do just that—work whenever possible. To ensure that we provide the appropriate work focus and work-related support for all those of working age, we will be setting the upper age limit for universal credit at pension credit qualifying age. Setting the pension credit qualifying age at an artificial point below women’s state pension age will therefore undermine this fundamental aspect of welfare reform.
The amendment also suggests that the means-tested help available through universal credit will not be adequate for those approaching state pension age, and this is not the case. Universal credit is intended to provide appropriate levels of support, including for those who, for whatever reason, are unable to work or have limited capacity for work. Universal credit will also provide for a more generous treatment of earnings, and it is not right to withdraw this support for people who wish to continue working.
To pick up the points made by the noble Baroness, Lady Drake, when she referred to the impact assessment, I should make clear that the stylised cases in the impact assessment are designed to show the maximum possible loss. Most of those affected will not experience such losses. The noble Baroness addressed the issue around minorities and disabled people. I accept that there will be differences, but we are determined, and we have various programmes now to do this, to tackle the labour market disadvantage that those groups have.
Given the proposed upper age limit for universal credit, the amendment is not particularly well targeted. The extent to which people may see any benefit will depend on their own circumstances and on those of their partner. I should also point out that as this change would require a concurrent but different rise in state pension age and the pension credit qualifying age, it would add complexity to the system which, as we discussed on the previous amendment, goes the opposite way from our intentions. It has the potential to create a very confusing message to give customers about qualifying ages and what benefits are available to them.
Pension credit is primarily a safety net benefit for those over state pension age. It has been set at women’s state pension age to avoid discrimination until men and women’s state pension age are equalised. There has never been an intention to raise the qualifying age above state pension age. It is clear that this amendment is intended to help those people who might be described as “vulnerable”—people who might be in ill health or who have been in manual jobs and are unable to continue working as state pension age increases.
I hope that the Committee will forgive me if I take the opportunity to answer the question raised by the noble Baroness, Lady Hollis, regarding the Marmot review. I have now been able to put my hands on those figures. She dropped a nought in the differences in life expectancy where the highest life expectancy, in Kensington and Chelsea, was not 17 years but 10.7 years above the worst, which was Blackpool, for men—
Baroness Hollis of Heigham
Perhaps the noble Lord will allow me to quote from the Strategic Review of Health Inequalities in England post-2010—the Marmot report, which states:
“In England, people living in the poorest neighbourhoods, will, on average, die seven years earlier than people living in the richest neighbourhoods”.
The report then refers to the graph in Figure 1, and continues:
“Even more disturbing, the average difference in disability-free life expectancy is 17 years … So, people in poorer areas not only die sooner, but they will also spend more of their shorter lives with a disability”.
The report goes on to state that even excluding the top 5 per cent and the bottom 5 per cent, the difference in years of disability-free life expectancy is 13 years.
Lord Freud
I thank the noble Baroness for saving my team from having to write a letter, given that she has isolated the issue. We are playing with different numbers—10.7, 17 and 7. I think that we have sorted out what each means. However, the point remains that for all groups there is a movement in the right direction towards longer lives and for longer healthy lives for all groups—albeit that there is a difference within groups.
Baroness Hollis of Heigham
Except that the point established by my noble friend Lady Drake and others is that the cuts, if you like, in spending on pensions and pension credit are falling heaviest on the poorest women who will have the least disability-free life expectancy along with their male counterparts.
Lord Freud
I need to come back to the point that working-age support systems are much better systems of supporting people, particularly by universal credit, than artificial manipulation of when pension age and pension credits click in. There is very little difference between the position of people who are just below state pension age and those just above it. We just happen to use this age as a useful justification of where we can draw the line. Just as there is little difference between the line at state pension age, so there is little difference between those who are 63 and 62 or 62 and 61. In benefit terms, the only difference is what help people might receive to get into or stay in employment. We are quite certain that we want people below state pension age to work if they possibly can. We cannot give up on these people. That has been going on too long. The right place for people below state pension age is on a working-age benefit, and universal credit, which will be available in 2016—although it is starting in 2013—will be the most suitable benefit.
It is important that we target means-tested help in the most appropriate way. State pension age is a fair way of separating out support for those of working age and of pension age. Ensuring that people get the appropriate work-related support and making work pay are essential to enable people to move out of poverty and build up sufficient resources for their retirement. For these reasons, I urge the noble Baroness, Lady Drake, to withdraw her amendment.
Baroness Drake
I shall try to pick up some of the points put by the noble Lord, Lord Freud. This amendment breaks the link between the state pension age and the pension credit qualifying age only until 2020 because the associated amendment puts a time limit on that. It seeks to replicate the 1995 timetable for equalisation because it is trying to address a problem created by the acceleration of the original timetable. It is not seeking to bind the Government’s hand once that problem has been dealt with. The amendment would allow the Government to restore the link between the state pension age and the pension qualifying age. In another place, in another debate, I might want to argue the merits of not doing that, but that is not what this amendment seeks to do. We have sought to avoid the complication of that debate. It is merely for a defined period to address this disproportionate income impact point from this accelerated timetable.
Baroness Drake
I would like to comment on Amendment 8, tabled in the name of the noble Lords, Lord German and Lord Stoneham, which has my sympathy. I concur with the comments made by the noble Lord, Lord German, that we are clearly all concerned with the consequences of the accelerated timetable. The noble Lord, Lord Boswell, referred to us all looking for different architectures with which we can address this matter, and one should never close one’s mind to architectures if one can get the outcome that one desires, or at least progress towards it.
With regard to the legs to the amendment—(a), (b) and (c)—on the basis of what I said on my Amendment 7, I wholeheartedly agree with making some pension credit adjustment but it would need to be made for both men and women, otherwise you would simply address the issue of poor women, not poor men.
On the question of providing for women with serious illness, those who are seriously ill clearly believe or feel that they have a payment that they have built up and are entitled to under the state pension system that has been withdrawn with little notice. They will have absolutely no prospects of adjusting to their loss, and are unlikely to benefit from the argument that they will live longer. I imagine that there would be some complexities in trying to administer a provision that focused on those with a serious illness, and I take my noble friend Lady Hollis’s point about who, and how much, should be paid.
It may be that the easiest solution is still to look at decelerating the timetable. As my noble friend Lord McKenzie said in responding to the amendment of the noble Lord, Lord Boswell, we are all keen to make progress and should stay open to looking at timetables. My noble friend and others have revealed how the timetable has an accelerating effect. There are those who lose for a year, those who lose for up to 18 months and those who lose for up to two years, so there is an accelerating impact in terms of numbers of people affected. Still, I would not want to fall out over architecture if there was a way of moving forward to get the kind of outcome that we all seem desirous of achieving—those of us moving amendments, anyway.
Lord Freud
I thank my noble friend Lord German for tabling the amendment. We have covered a lot of the ground in relation to it already, so I shall try not to be repetitious. We are talking about what has been variously described as an acceleration bubble, a moving horizon or a squidgy balloon—as the noble Baroness, Lady Drake, said. We are effectively looking at concessions for women born between July 1953 and September 1955.
I am not in a position at this stage to provide any additional information about discussions on a single tier, which I referred to at Second Reading, but one of the issues here is clearly that when one looks at the complexity of the architecture, one has to have an eye to whatever might or might not emerge from those discussions. We have already talked about freezing or delaying the increase in the pension credit qualifying age for people affected by the changes in state pension age. We are not going to make a song and dance about technical drafting here, although the noble Baroness, Lady Drake, made the point about the application of the amendment to women, when it would actually have to apply to men. However, let us put that to one side.
The issue that I aimed to emphasise in the previous discussion was that pitching the pension credit qualifying age at a point below the state pension age for a specific group would undermine fundamental welfare reforms. However, it is not about just the structure—and I accept that this is about a temporary change—or purely the money; it is complex for customers and complex to administer. That is one of the reasons why that solution is difficult, if not undesirable.
In response to the request of the noble Baroness, Lady Hollis, for me to write to her on the costs of paying people in between the old and the new pension ages, I am happy to look at those costs and to write to interested noble Lords. I imagine that that includes most of us in the Room.
I move on to the issue of serious illness and emphasise that we have great sympathy for those with ill health, including those in this particular cohort of women. However, I must point out that help and benefits are already available for people with health problems and I do not therefore accept that we need to provide additional financial support, whether that is in the form of a payment above what we already pay out or some bespoke pension age arrangement.
The final option suggested by the amendment is slowing the acceleration of the pension age increase for these women.
I can assure noble Lords that, when we were considering how to bring forward the increase to 66, we looked at whether we could start that change for men slightly earlier than for women, to avoid altering women’s state pension age before 2020. The reason that we have not done this is because it would be unfair to increase the difference in treatment between men and women. It would also be unfair to prolong the difference in treatment beyond the period already agreed. I will take this opportunity to explain why, and I am picking up the question raised by my noble friend Lord Boswell earlier in the afternoon. The equal treatment directive allows the setting of the state pension age to be a limited exception to the overarching rule that men and women must be treated equally in social security matters. This exemption, or exception, is only temporary to give member states time to adjust their state pension ages so as to bring women’s state pension age into line with men’s. As we know, the legislation in 1995 set out a timetable for equalising the state pension ages between 2010 and 2020, so anything we do now will be measured against that timeline. That is why we decided that we must increase the state pension age to 66 only after women’s state pension age has reached 65. I therefore urge the noble Lord to withdraw his amendment.
Lord German
My Lords, when I started writing this amendment, I was trying to answer what seemed to me a fairly straightforward and simple question. There is a group of women, born between these years, who will suffer financially more than those who are roughly the same age on either side of them. The question I was seeking to answer was whether the Government will find a way of helping them. It is as simple as that. I was seeking to give the Government as much of an open hand as they wished, in order to say that they recognised that some of the people in this cohort will be suffering financially more than others, simply because of the date of their birth, which was the factor I wanted to take into account. I was not wanting to dwell on the method of operation, but I was seeking to find a way in which the Government might come forward with some opportunity for making sure that they redressed that financial imbalance in a way which they thought was reasonable, effective, and did not cost as much as the £7 billion or £10 billion which the Minister has already adhered to. I hope that, during the course of the future weeks before we reach Report, the Minister will reflect on that matter. There has been a widespread agreement around this Committee, from all sides, that there needs to be some form of redress for a particular group of women in a particular way which needs to be defined, and perhaps the department can look at that. I hope that the Minister will think of coming back to that matter by Report, with a view on how that might be addressed.
Lord Boswell of Aynho
My Lords, the noble Lord, Lord McKenzie, has been kind enough both to mention my name and to tempt me. I shall disappoint the Committee, I am sure, by indicating that I have no intention whatever of explaining how PUCODIs work or how important they are to one’s lifestyle. All I can say is that I indicated at Second Reading, and a further reading of my recent annual pension statement appears to confirm this, that I think that I have one. However, rather in the manner of one of my masters at school who conducted a survey among the masters’ common room into the wearing of long johns in the winter and found that a significant number of people did not know, I am not absolutely sure that I have one. For the avoidance of doubt, it certainly is not in the range of £14 a week; it is much lower than that, although it is more than £1.
I simply make the point that this is an example of complexity and I am sure that we need to remove it. I am pleased to see the noble Lord who moved the amendment nodding to that. It is an example of how even people who know a modest amount about the system do not know everything that is applied. It creates problems that are almost in geometric progression: the more complex the system is, the less easy it is for people to understand it and the greater the chance of making mistakes. As one building block of the programme of simplification and consolidation, this is a modest but essential measure. I look forward to the Minister’s explanation—if he understands PUCODIs too.
Lord Freud
My Lords, I really am grateful to the noble Lord for giving me this incredible opportunity to talk about PUCODIs. I have to quote the noble Lord himself from 2007, when he said:
“This is a technical area and, despite the hour, I hope that the Committee will bear with me as I explain”.—[Official Report, 4/6/07; col. 875.]
He then gave an explanation, but I am convinced that, to his disgrace, he has forgotten every single word that he said to the Committee.
The essential point regarding the payable uprated contracted-out deduction increment is that these payments are very small. As the noble Lord pointed out, 77 per cent of recipients get less than £1 per week. Where it is in payment, it represents 0.6 per cent, on average, of an individual state pension income. Most of the people in receipt are women—93,000 out of 118,000 people are women—and the average received by women is slightly higher than by men. Bluntly, though, both are around 20p per week.
Around 6,000 of the 9,000 in receipt of inherited awards are women. The average received by women is again similar to men: around 30p per week. The original policy intention of the PUCODI was to ensure parity between those who were contracted out, and those who were not. However, as noble Lords will be aware, contracting-out on a defined contribution basis is being abolished from April 2012. The proposed abolition of new awards of PUCODIs for members of such schemes is linked to the abolition of defined contribution contracting-out. I shall not go into the detail of the timings, except to assure the noble Lord that it has never been the Government’s intention to bring the proposed legislation into force before 6 April 2012.
I am not sure that I have a reliable spread, although I am very happy to write making clear what the spread of payments is. However, given the averages we are talking about, there are going to be fairly few outliers. The point is that, as the name suggests, there is an element of choice for people when they take them. They are delaying payment of their contracted-out pension, and there is therefore an element of choice. If the loss is too much, they can start to take it, so there is an element of market balance for the outliers. I will write about that very specific point beyond the averages.
As the noble Lord said in his introduction, it is not his intention to do anything more than find out some of this detail, and I am sure that he will be pleased to withdraw the amendment.
Lord McKenzie of Luton
I thank the Minister and the noble Lord, Lord Boswell, for participating and will be delighted to withdraw the amendment. I will be very happy to receive a letter in due course. I remember reading out a script in 2008 or 2007 when I think it was the noble Lord, Lord Skelmersdale, who was leading on the opposition Benches. He assumed I did not understand it because I read the script very quickly. I beg leave to withdraw the amendment.
Lord McKenzie of Luton
My Lords, my noble friend Lady Drake and I have put our name to this amendment because we support its thrust. Having heard my noble friend, I gather that, perhaps unsurprisingly, she is even more ambitious for this amendment than I took it to be on first reading. It is entirely consistent with the progress that has been made in crediting people into the pension system, in any event, over many years. It is highly relevant—we heard from the noble Lord, Lord Stoneham, and my noble friend Lady Hollis about the growing importance of part-time work in our economy.
When I first read the amendment, I thought that its thrust was to say that when you aggregate employment earnings, if you are above the lower earnings limit, you get credited in. That in itself would not require any payments from the individual or any payments on behalf of any employer. That, at least, would be progress from where we are. There are arrangements that you have to aggregate if you are within associated companies, but that is a separate case.
If it is possible, as my noble friend suggested, perhaps in discussion with the noble Lord, to go further and say that we could aggregate and then work out what the employee and employer contributions would be and how we divvied that up across employers, then that would be a significant improvement and an advance. That is not only because of the state pension arrangements, with credited and contributory benefits in any event, but for the point that the noble Lord, Lord Stoneham, made about auto-enrolment. If we can aggregate and reach qualifying earnings, particularly if qualifying earnings are going to be pitched at the primary threshold, or at the secondary threshold, which I think is the same thing at the moment, then we can also seek to ensure that people on part-time earnings who would not otherwise qualify in respect of a single employment could, on some basis or another, by aggregation and then divvying up across employers, be entitled to auto-enrolment. At its most basic, lowest level, the ability to aggregate and credit in, for the purposes of the state pension, would be a valuable gain. To be able to go further, as is the ambition of my noble friend, would be a very considerable advance, and if the Minister’s command of technology enables him to deliver on that, we would all be delighted.
Lord Freud
My Lords, I am very grateful to the noble Baroness, Lady Hollis, for raising this matter. Clearly this debate has been conducted before, although I was not present, but there is a potentially a new context for it. The fundamental issue of the aggregation of low earnings from multiple part-time jobs and how they could be made to qualify for basic state pension has been a matter of concern to her for some time. It was considered by the Pensions Commission and during the passage of the Pensions Act 2007.
Like her, I am keen to encourage mini-jobs, which I think are not just good in themselves for people in supplementing income, but are an invaluable stepping stone which we have made difficult for people to use in the current welfare system. A system that encourages that process and takes it out of the informal or grey economy and into the proper economy, will be immensely valuable for many people. What I am going to say at this stage and in this debate will be rather correct, in the sense that, in the present situation and in the context of our present systems, it is not be possible to go ahead with something like this. Until we have a new system defined, laid out, and understand its technology, we will not be able to look seriously at what we can do here, and it is an immensely complicated issue in practice. The structure of this answer may be negative as I go through it.
Lord Freud
Thank you, cautious is a much better word. It will be somewhat cautious, but I will make a commitment at the end of it, based on what might be achievable later.
I start saying that many of the changes that have been made have already reduced the problem, and I know that the noble Baroness would have been involved in making those changes. I am thinking in particular of the reduction to a 30-year contribution making up a pension. The estimate now is that in only a few years’ time 90 per cent of women and men—both genders for different reasons—reaching state pension age will be entitled to the full basic state pension.
Lord McKenzie of Luton
My Lords, we are back on a couple of probing amendments. In reverse order, Amendment 15 is merely probing whether the specified date would always be at the commencement of a tax year. I can see that it could be organised this way, but is it inevitable? If not, then something along the lines of this amendment would be appropriate. Amendment 14 is a more substantial probe, though I see that the date has come out as 2005, rather than as 2025, which was originally intended. It is not particularly significant, because it was just a peg on which to hang a question.
Clause 3 introduces Schedule 3, which changed some of the provisions in the Pensions Act 2008 concerning the consolidation of the additional pension. The idea is, at some point in time, to effectively bundle together the various contracted-out rights, and to apply actuarial factors to smooth the disparities in entitlement. We obviously support this approach, but as the notes to the Bill set out, a consequence of smoothing in cash-flow terms is that the Government are likely to pay more earlier and less later than under the current system. I understand that that is the thrust of it. Rather than lock in to the flat-rate introduction year for the start of this process, the Government now seek flexibility by way of an order. I would be grateful if the Minister could say how much flexibility they consider it necessary to have. By how many years is it estimated that the consolidation will have to be delayed or indeed advanced, if that is the thrust of it? Could he give us some indication of what this change means in terms of the likely process of consolidation? What does this mean for the wider aspiration, touched on earlier in our debates, of consolidating the basic state pension with the state second pension? I understand what the Minister said earlier about being unable to advance much on that, so I will not press him on that point, but there is a point about the interrelation of this with that process. Presumably, consolidation of the additional pension is a necessary prerequisite, and perhaps he will confirm that.
On one other practical point, I have a recollection that we were chided during the passage of the 2008 Act by the noble Baroness, Lady Noakes, who is not with us today, on our adherence to advice from actuaries. We had some discussion on whether the actuarial smoothing had to be effectively determined by the actuaries, or by Ministers on the basis of advice. Perhaps the Minister could remind me where we ended up on that issue. I beg to move.
Lord Freud
My Lords, I thank the noble Lord for the opportunities to speak to Amendments 14 and 15, which seek to define the latest possible group for whom the additional pension consolidation would be introduced. The amendments tabled by the noble Lord, Lord McKenzie, seek to fix the affected group in relation to a somewhat arbitrary date of 2025. It might be helpful if I provide some context as to why we have taken steps to replace the previous certainty as to the start date and the affected group with a power to define both by way of regulations. Clause 3 and Schedule 3 of the Bill provide flexibility around the implementation of consolidation, which, as provided for in the Pensions Act 2008, simplifies past earnings-related pension rights.
Lord McKenzie of Luton
I thank the Minister for that response. I will read the record with interest, but I will certainly withdraw the amendment.
I just want to be clear on a couple of points. I think the Minister said that something like £200 million per year would be involved in the smoothing exercise. Did I understand that correctly?
Lord Freud
Yes. At the early stages there are some years where the figure peaks at around £210 million and then comes back later, so it is a net early annual cost to the state with that maximum, coming down later to a net present cost that is neutral. From memory, the peak year was coming out at—was it 1925? Sorry, 2025. I will get the right century soon. The peak would be early in the 2020s until 2025.
Lord McKenzie of Luton
I am grateful for that response. I rather took from reading the literature that the cash flow issue was the real driver in all this, but from what the Minister has said there are obviously broader ramifications. I will read the record.
Might the Minister deal with the point about the other minor amendment about defining a tax year? At the moment the Bill says,
“the tax year beginning with the specified date or a subsequent tax year”.
That presupposes that the specified date would be at the start of a tax year. My question was: does that inevitably follow?
Lord Freud
The noble Lord, as ever, is spot on in his assumption. Yes, it is at the start of the tax year.
Lord McKenzie of Luton
I am grateful for that. I can see that it is meant to be at the start of the tax year. I suppose that I have a question about what makes it the start of the tax year, but perhaps we will leave that for another occasion. I am happy to beg leave to withdraw the amendment.
Pensions Bill [HL]
Lord Freud Excerpts(13 years, 3 months ago)
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The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I would like to pay tribute to those whose diligent work underpins this Bill, in particular the former pensions commissioners the noble Lord, Lord Turner, and the noble Baroness, Lady Drake, and the noble Lord, Lord McKenzie, for his work on the previous Pensions Acts. I am sure that this will be a very interesting and well informed debate.
It is the nature of the legislative process that this Bill sharpens and defines the Pensions Acts that have passed before. The foundations of the current pensions regime stretch back to Lloyd George's epoch and we strive, as many have done before, to enhance the system and ensure that stewardship of the pensions system in our own era is worthy of our predecessors.
Even since the noble Lord, Lord McKenzie, stood in this spot in this House in 2008, our pensions landscape has continued to change. In 2008, the Office for National Statistics produced new population projections. If noble Lords would indulge me for a minute, it is worth putting this change into context. In 1981, someone retiring at 65 had on average 16 years in retirement. Today, someone retiring at 65 will spend on average over 21 years in retirement. In future, this is forecast to increase, with some spending half their adult life in retirement. With every new demographic forecast comes a continuing increase in life expectancy.
The very fact that people are living longer is testament to the many welcome advances made in medicine, in technology and in standards of living. Yet the increase in life expectancy places a great deal of pressure on the pensions system. Despite the policies implemented by the coalition Government that are aimed at restoring sustainable public finances, the Office for Budget Responsibility has projected that the impact of an ageing society could wipe out any progress on deficit reduction. Furthermore, the OBR's projections indicate that if the impact of the longevity challenge is left unaddressed, public sector net debt could reach 100 per cent of GDP by 2050. This is simply untenable.
Pension reform has traditionally proved the ability of the legislature to build consensus on an issue. We all agree that something must be done; that much is clear. Therefore, as we celebrate the fact that people are living longer, healthier lives, we also have to recognise that we need to establish a fair and sustainable pensions system to meet the inevitable challenges of increasing longevity.
We need a fair system that provides a decent income for an individual in retirement and distributes the costs appropriately between the generations; we need a sustainable system that acknowledges the changes in life expectancy and adapts to the reality of the society in which we live; and we need a balanced system in which the state, individuals and employers all play their role in achieving a fairer balance between work, saving and retirement.
This Bill makes amendments to existing legislation by correcting, revising and adding, where appropriate, to ensure that our pensions legislation is up to date and fit for the 21st century. A higher proportion of people are now living to 65 than ever before. Life expectancy beyond 65 is increasing steadily. Yet under existing legislation, the timetable for the state pension age increase to 66 was not due to be completed for another 16 years.
The Pensions Commission's 2005 report stated unequivocally that,
“A policy which allows each generation to spend an increasing proportion of life in retirement financed by an increased level of public pension expenditure as a percentage of GDP will be unsustainable in the long run and unfair to subsequent generations of taxpayers”.
In short, the timetable that provided the foundations for the 2007 Act is out of date, since that Act was based on the 2004 ONS projections of average life expectancy.
Noble Lords will be pleased to hear that 2006 was a golden year for all of us, because in that year the ONS updated its expectancy projections; and compared with 2004, many of us lucky individuals gathered here ended the year nearly a year younger than at the start because of this revision. Of course I am looking at age in terms of how long you are expected to have left rather than how long you have had. No anti-ageing cream or time machine can be as effective as what we saw in that wonderful year. But there is a price. If you take just the cohort of people retiring in 2010, the latest increase in life expectancy equates to an estimated £6.5 billion in cost, in constant price terms, over the lifetime of that single pensioner cohort. Given the scale of these costs, it is simply not affordable to wait to increase the state pension age, and it is certainly not fair to the working-age generation who fund the state pension. As outlined in the Government’s Command Paper published in November 2010, Clause 1 of the Bill will bring forward the timetable to complete the equalisation of women’s state pension age with men’s by November 2018. We will then raise the state pension age for both men and women to 66 by April 2020.
Noble Lords may wish to note that increasing the state pension age is something of a trend internationally. Ireland has already legislated for the pension age to be raised to 66 by 2014. Similarly, the Netherlands and Australia are increasing the state pension age to 66 by 2020. There is widespread recognition across the developed world that this is an issue that must be addressed.
The Government want all pensioners to have a decent and secure income in their retirement. That is why we have introduced the triple guarantee, for example, to ensure that the basic state pension will help to provide a more solid financial foundation for pensioners from the state. But alongside this, the Government must also encourage and enable a culture of individual savings. Around 7 million people are currently not saving enough to meet their retirement aspirations. This means that if we do not address the issue of under-saving now, huge numbers of people reaching retirement will be met with a pension income that is less than they hoped for. It is imperative that we encourage individuals to save for their retirement now rather than as a belated afterthought. The automatic enrolment of individuals into a workplace pension means that people will start thinking about their retirement in good time.
So, under the Pensions Act 2008, all employers will be required automatically to enrol all eligible workers into a qualifying workplace pension scheme from 2012. For the first time, employers will be obliged to make a contribution to that arrangement. I would describe this as an example of asymmetric paternalism—policy benefiting those who would perhaps not plan ahead but simultaneously allowing choice for those who do.
The principle of automatic enrolment has already been debated in this House during the passing of the Pensions Act 2008. We are absolutely committed to that principle. The Bill will tweak some of the parameters of the policy to ensure that automatic enrolment works as effectively as possible. This is what was set out in the recent independent review, Making Automatic Enrolment Work.
We propose a slight increase to the earnings threshold at which automatic enrolment is triggered, aligning it with the basic rate tax threshold. This simplifies the administration by aligning automatic enrolment with existing thresholds that employers use. We believe that this measure will create a buffer against de mimimis contributions without creating a significant contribution cliff edge.
The Bill introduces measures to ease the regulatory burden on employers by allowing a waiting period of up to three months. This is on the proviso that employers must provide a notice of their intention to invoke a waiting period and workers are able to opt in to pension saving if they wish to do so within this period.
The Bill also contains a measure to enable employers who are using money purchase schemes to certify that their scheme satisfies the relevant quality requirements. My department has worked closely with employers and industry bodies, including the ABI, CBI and NAPF, to design a straightforward test that will work in practice. The details of the test will be set out in regulations, but this clause sets out appropriate parameters to deliver an easement for employers to continue delivering quality pension provision while protecting individuals.
As a result of the workplace pension reforms, we expect 4 million to 8 million people to start saving, or save more, in all forms of workplace pension schemes. These savings could make all the difference to a comfortable retirement. To put this in financial terms, we estimate that someone earning £28,000 a year and saving into a workplace pension, with an employer contribution of 3 per cent, could increase their pension pot by an extra £650 a year as a result of the reforms. This will transform the pensions landscape in this country and help steer individuals towards a more secure future.
Part 3 of the Bill covers occupational pension measures. The Bill amends a few rogue references to the retail prices index in existing pensions legislation to set occupational pension schemes’ indexation and revaluation at the “general level of prices”. This follows on from the Government’s decision to use the consumer prices index, as announced in the emergency Budget. We believe that the CPI is the most appropriate measure of the general level of prices in this country for the uprating of pensions. If noble Lords will indulge me, I shall explain this approach. For example, as only 7 per cent of pensioners have a mortgage, with about 70 per cent of pensioners owning their own homes outright, the Government consider it appropriate and correct to use an index that excludes mortgage interest payments. The CPI excludes these costs.
Furthermore—a technical matter which I find fascinating—the CPI takes account of consumers trading down to cheaper goods when prices rise: the so-called substitution effect. The RPI does not do this. That does not make the RPI an inappropriate measure, but it makes the CPI a measure that is more appropriate in this instance. Who does not switch brands of teabags or biscuits when feeling the pinch on the wallet? It is basic budgeting. The CPI reflects the changes that people make. Suffice it to reiterate the words spoken about CPI in 2003 by the then Chancellor, Gordon Brown:
“It is more reliable … It is more precise”.—[Official Report, Commons, 10/12/03; col. 1063.]
I shall not weary your Lordships now with the details of the methodology behind the two indices and the advantages of that employed by the CPI. The comparison between the two indices is what fuels this debate—the question of which is the most appropriate index for pension payments to reflect inflation.
We must remember that the key legislation for setting the statutory minima for the revaluation and indexation of occupational pensions is not in this Bill. The Occupational Pensions (Revaluation) Order 2010 was laid in December and came into force earlier this year. Legislation requires the Secretary of State to consider the “general level of prices in Great Britain”, not a specific index or a specific price. Furthermore, indexation is aimed at protecting purchasing power, and the use of the CPI does indeed protect an individual’s occupational pension from inflation. Noble Lords may also note that any schemes wishing to pay the higher of RPI or CPI are perfectly able to do so. In similar vein, the Bill amends references to compensation paid by the Pension Protection Fund. Provisions are also included to remove the indexation requirement for cash balance benefits.
The Bill also introduces provisions to allow for contributions to be taken from members of the salaried judiciary towards the cost of providing personal pension benefits. The interim report of the noble Lord, Lord Hutton, found that the value of public service pensions had been increasing following dramatic increases in life expectancy at retirement. The Government have accepted the noble Lord’s recommendations that the most effective way to make short-term savings on the cost of public service pensions is to increase member contributions. In view of this recommendation, it is right that judges, like other public service pension scheme members, should begin to contribute towards their own pensions.
In 2009-10, judges paid £4.3 million in total towards dependants’ benefits, compared to a contribution by the Government—and, ultimately, the taxpayer—of nearly £84 million. There is clearly a good reason for members of the judiciary to make a greater contribution if their pensions are to remain fair to them and to taxpayers, as well as remaining affordable for the country. I would therefore argue that the provisions for the judiciary included in the Bill represent a fair, affordable and responsible way forward.
Indeed, the principle of contribution is already contained within judicial pension schemes. Existing provisions are in place for contributions to be taken from members of judicial pension schemes towards the costs of widows’, widowers’, surviving partners’ and children’s benefits. The Bill proposes to extend the contributory principle to cover personal pension benefits, with rates to be set through secondary legislation, consistent with the approach taken for existing contributions. However, judicial officeholders who have already accrued full pension benefits will not be required to contribute under this measure. The Bill legislates for this provision to be phased in from April 2012, and the savings on pension costs will make an important contribution to our commitment to deficit reduction.
I must also acknowledge that esteemed body, the Delegated Powers and Regulatory Reform Committee, which has published a report on the delegation of powers contained within the Bill. The committee commented on one of the amendments, in Schedule 4 to the Bill, relating to the Pension Protection Fund, and it has requested an explanation of the relative financial significance for pension schemes of the PPF levy in comparison with the pension protection levy and the general levy.
I would be happy to clarify this matter for the House. The amounts to be recovered on behalf of the Secretary of State through the PPF administration levy and the general levy are broadly equivalent. For both the financial year ending 31 March 2011 and the financial year ending 31 March 2012, the PPF administration levy was set to recoup £22 million; for the same periods, the general levy was set to recoup £43 million a year. By comparison, the amounts to be recovered on behalf of the board of the Pension Protection Fund through the pension protection levy are much higher. For the financial year ending 31 March 2011, the pension protection levy was set to recoup £720 million; for the financial year ending 31 March 2012, the levy was set to recoup £600 million. I hope this satisfies the request of the committee.
The Bill contains several parts, but these parts are joined together by a common thread—readjusting the pensions landscape to work towards a more sustainable system in the face of increasing longevity. I do not need to labour the point about the scale of this challenge: many noble Lords present have contributed richly to writing the book on pensions reform, including taking legislation through this House and another place. I will, however, reiterate that the Bill provides the essential amendments needed to ensure that we have a fair, affordable and sustainable pension system to pass on to the next generation. I beg to move.